Irs 170 exchange

Buying & Selling Real Estate
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Irs 170 exchange

Ash Patel
Full time investor · Cincinnati, OH · Member since 2013 · 405 posts · 312 votes

I received an offer on a commercial property today.  The buyer is using a company called welfont group to do a 170 exchange.   I searched through BP and didn't find anything about 170s. 

I would appreciate any insight on this.   Specifically:

Can I get the funds at closing or do I have to wait?

Can I 1031 the proceeds just like any other?

What are my tax implications compared to a normal cap gains sale?

If no one chimes in, I will run it by my cpa and report back.  

We are pleased to bring you an offer for the property located at 1014 State Route 125 with net proceeds estimated at $615,372.

I have attached the offer with the LOI included. Because our buyer is a nonprofit entity, and this property is ideal for a 170 Exchange*, our clients offer is very strong (valued above list price). This offer provides cash at closing with the balance of the proceeds guaranteed by State and Federal Governments.

For a more detailed explanation of a 170 Exchange please review this video: (Understanding a Sect. 170 Exchange) and then pass it along to your client with the offer. The video will be invaluable to them in understanding the 170 Exchange and will be easy for them to share with their CPA, etc., if so desired.

I look forward to reviewing the offer with you in detail and answering any questions you or your client may have.

Please call me at your earliest convenience or email me with a good time for me to call you.

*Our clients have closed on over $150 million worth of transactions using a Sect. 170 Exchange. More than 60 properties in the last two years alone.

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Laurence T.
Sharon, MA · Member since 2015 · 4 posts · 1 vote
7y

Welfont did not make up the Section 170 "Bargain Sale". It has been part of the tax code since 1917. All Welfont does is bring the buyer (a 3rd party non-profit organization) to the table and help facilitate the process. The property must be appraised by a 3rd party licensed appraiser. The seller gets the appraised value amount (minus the cash amount the buyer pays) as a tax deduction (which can be rolled over up to an additional 5 years). If the seller(s) makes enough income to utilize most or all of the tax deduction, they can often net more from the tax deduction, combined with whatever amount of cash the buyer pays at closing, than they would from a traditional sale to a regular all-cash buyer. I think the "ideal" seller who benefits the most from this type of transaction is one who has a low cost basis in the property and low mortgage liability, and anticipates a substantial tax liability from capital gains and/or other income.  

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  • J Scott Hamilton
    Entrepreneur and Linguist · Braddock, PA · Member since 2015 · 70 posts · 40 votes
    10y

    I looked at Welfont literature online, and it was a head scratcher. It looks like the program is aimed at for-profit entities unloading disadvantaged properties to a 501(c)3 charity at better than FMV assuming FMV is based on a distressed sale appraisal and not want the property could fetch in perfect market conditions. The difference between FMV and appraised value is what you get back as a charitable deduction. This works if the seller is not a charity and the buyer is a charity.

    Not knowing how the case law would effect trying to wrap a 1031 around a 170, my guess is the IRS wouldn't like it.  The 1031 is based on trading like for like, so it's effectively a barter.  The 170 is structured as a cash sale where you are most definitely taking constructing receipt of the proceeds. 

    But I'm not a tax lawyer, just a former licensed preparer.

    In the big picture, it would seem to me that if a non-profit likes your property enough to give you an unsolicited offer, it's probably going to be the best offer you're going to get if you wanted to unload the property. But if I was worried about the tax bill, the charitable deduction would unlikely be enough to compensate for the capital gains and depreciation recapture you'll suffer when the property sells.

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  • Ash Patel
    OP
    Full time investor · Cincinnati, OH · Member since 2013 · 405 posts · 312 votes
    10y

    @J Scott Hamilton  I had my CPA look into this and a pretty effective pitch.  I first had an "analyst" call me on a listing that was previously on loopnet but I took it down.  The analyst asked several questions and told me that if his company liked what they saw, they would pursue an offer.  

    A week later I get an email stating they want to make me an offer for just under my asking price of $650k.  They send me a long email stating they are the middle man for non-profit that is purchasing investment property.  They tell me the net proceeds from my building will be $617k  The non-profit would put down roughly $70k in cash but they would appraise the property at roughly $1.1m.   The difference between what they put down and the appraised value would be my charitable donation.  

    All of this sounded legit when you read through their documentation.  They would give you a form 8283 that states the appraised value of the property.  The kicker in all of this is that after you sell your property and begin to write off the charitable donation, what happens if the IRS contests your appraised value.  If that value goes down after an audit, you are out several hundred thousand dollars.  

    Not worth it in my opinion.  

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  • J Scott Hamilton
    Entrepreneur and Linguist · Braddock, PA · Member since 2015 · 70 posts · 40 votes
    10y
    Originally posted by @Ash Patel:

    @J Scott Hamilton  I had my CPA look into this and a pretty effective pitch...

    ...All of this sounded legit when you read through their documentation.  They would give you a form 8283 that states the appraised value of the property.  The kicker in all of this is that after you sell your property and begin to write off the charitable donation, what happens if the IRS contests your appraised value.  If that value goes down after an audit, you are out several hundred thousand dollars.  

    Not worth it in my opinion.  

    @Ash Patel, herein lies what I see as the crux of the matter. Looking at Form 8283, I can see a couple of places where although Section 170 property is not made explicit, it could be indicated so on the form with an attached statement. Even if the intermediary on the sending end of the 8283 is that thorough, the very nature of a Section 170 appraisal could make it open to challenge, since comps subject to the Section 170 methodology are difficult if not impossible to obtain. It's about 450K of charitable contribution which is unnervingly close to the $500K that the IRS doesn't like.

    Although many might want to take the deduction and try to ride out the statute of limitations on return filing, I completely understand how you would not want to put yourself at risk of an audit.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    @Bill Exeter @Steven Hamilton II ??

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    10y

    Hey all,

    I have not personally been involved in a 170 Exchange.  Our outside tax counsel has been involved in two of them, and his comments were essentially the same as above.  You have to be very careful, and there are sufficient areas that have little guidance that could be problematic during an audit (as pointed out above by @Steven Hamilton II).  I would steer clear of it since it is for their benefit and not your benefit. 

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
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  • Ash Patel
    OP
    Full time investor · Cincinnati, OH · Member since 2013 · 405 posts · 312 votes
    10y

    Here is a video they sent me to "educate myself" on this whole deal.  170 exchange

    At the 6:00 min mark they explain how they are able to appraise properties so high.  This seems so simple and so easy to replicate that everyone should be doing it.  I guess that kind of answers it!  As @Bill Exeter and @J Scott Hamilton pointed out, there are just too many details that are untested and can come back to bite you well down the road.

    Thank you all!!!!

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  • Sharon Thompson
    Residential and Commercial Real Estate Agent · Indianapolis, IN · Member since 2016 · 13 posts · 1 vote
    10y

    I just had a seller get an offer from Welfont for an 170 Exchange.  I haven't been able to find anyone by phone or email a few days into the offer.

    Is this a legit idea?  Is this a legit company?

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    7y

    It is very much like donating appreciated securities.  You can donate appreciated real estate. My only issue is it seems like they are inflating values and issuing letters that have certain requirements namely being the easement cannot be contingent on the deduction being allowed. 

    [email protected]224-381-2660
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  • Wyatt Franta
    Real Estate Broker · Vancouver, WA · Member since 2018 · 168 posts · 120 votes
    7y
    Originally posted by @Laurence T.:

    HI, I've worked as an agent for Welfont for about 5 months now. Just closed my first deal with them and it went very well and the seller seemed to be very happy. I believe the seller netted more through the cash the non-profit paid, and through the tax deductions they got, than they would have had they sold it to a regular buyer at more than listing price. Welfont just made INC.'s #1 fastest growing brokerage in America, so the "Section 170" really works if the seller can utilize the tax deductions. 

    Let me know if you want to talk about any specific properties you have, and I am happy to educate you as best I can. 

    Hi Laurence,

    Could you give everyone in this thread a run-down on how a 170 is performed and the benefits to it? If we all can get a better understanding, I think this could be something we can look into as an investment strategy.

    Thanks!

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  • Laurence T.
    Sharon, MA · Member since 2015 · 4 posts · 1 vote
    7y

    Welfont did not make up the Section 170 "Bargain Sale". It has been part of the tax code since 1917. All Welfont does is bring the buyer (a 3rd party non-profit organization) to the table and help facilitate the process. The property must be appraised by a 3rd party licensed appraiser. The seller gets the appraised value amount (minus the cash amount the buyer pays) as a tax deduction (which can be rolled over up to an additional 5 years). If the seller(s) makes enough income to utilize most or all of the tax deduction, they can often net more from the tax deduction, combined with whatever amount of cash the buyer pays at closing, than they would from a traditional sale to a regular all-cash buyer. I think the "ideal" seller who benefits the most from this type of transaction is one who has a low cost basis in the property and low mortgage liability, and anticipates a substantial tax liability from capital gains and/or other income.  

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