Using Internal Revenue Code 170 To Advantage

Please do not get upset. I’m not going to explain the intricacies of IRC 170, God forbid!  However, what I do want to do  is explain how an owner, with a difficult property to sell, might think of employing  IRC 170 to get rid of the property.

A company might have an encumbrance on its property such as being in a flood zone or simply being  an unattractive piece . In these cases, it is likely that the property stays  on the market for a couple of years without even a nibble.  Indeed, in the Northeast, storms “Sandy” and “Irene”  created a veritable freeze on selling a property in  areas where creeks have overflowed  causing vast damage to both real estate and personal property. So, what to do?

To use IRC 170, the property owner must have income from many other sources. Ideally, the property owner is a corporation which has been frustrated over the years holding idle assets such as buildings and land that have remained dormant with the attendant negative factors such as trespassing, vandalism, etc., being part of the scene.

Under those types of circumstances, the corporation can reach out to intermediaries like Welfont in Tampa which have strong connections to a firm such as Charities Partners Network Inc.,  which  have charitable foundations under its umbrella.
Assume these facts:

Corporation ABC has Net Before Tax Income of $2,000,000. Assume also that ABC has a corporate Federal Tax Rate of 40%

$2,000,000 x 40% = $800,000 to be paid in Federal Income Tax

However, assume a bright young Blau & Berg broker finds a property appraised at $1,000,000 who encourages ABC  to donate the property because that broker is smart enough to know that under URC 170, ABC can take a deduction against income.

So under the above scenario, the math becomes simple:

NBT $2,000,000 – $1,000,000 (value of the land donated) = $1,000,000 NBTx 40% = $400,000 tax to be paid to Uncle Sam instead of $800,000. So, with a donation of an ugly piece of property to a registered 501C charity, ABC saves not only $400,000 in tax but now with the transfer of title, carrying costs such as real estate taxes, insurance, maintenance, snow removal, etc., are now saved. It is likely that the Donor will pay a broker a commission on the tax benefit, i.e.$400,000. The broker should ask for at least 6% since this is a special type of deal and may take ”forever” to consummate the transaction.

It should be pointed out that the value of the property must be verified by a licensed appraiser.  In fact, both the donor and the charity will have the property appraised to cover all bases. What is also interesting is that the 501C charity may want to sell the property for a value much lower than the appraised value to generate its own cash flow at a later date . If the young Blau & Berg broker plays his/her cards right, a commission could be paid to such aggressive broker on the sale end.  The buyer in turn  may have a legitimate use of the beleaguered property, but at a much lower cost than he would have had to pay if he purchased the property outright from ABC Corp.

It should be re-emphasized that for this type of deal to happen, there must be an appraisal performed on both sides and the charities must be a 501C Corp. Given the State of New Jersey’s loss of value in corporate properties over the last several years, deals can be made as discussed.