1031 with a 501(C)3 partnership?

[Dustin Lyle]

As some of you already know from our personal conversations, I just recently gained 501(C)3 exemption for my non profit. I am now vigorously looking at creative ways to super size my foundation. I came across a non profit based out of Newport Beach, Ca, That take a minority interest with a buyer and purchase property from sellers who are using a 1031. I am assuming the interest the non profit is taking would be a "charitable donation" from the seller to offset gains not realized by the 1031? Has anyone ever seen anything like this OR had any experience with it? Being creative, I can think of a few ways this might be feasible..

[Bill Gulley]

Hi Dustin, I see three issues here;

What is the mission of the non-profit and it's qualifying purpose? While there is no proabition to a 501(C) (3) from entering into transactions for a profit, the deductability for the seller may be effected as the contribution is contingent on a beneficial gain by the taxpayer. This may be viewed as a sham transaction. You should get a determination on this strategy from the IRS before you begin using this as a business strategy. Contact a CPA familiar with non-profit accounting and taxation. My opinon is it is not a qualified transaction.

Next, is the lender. They may have issues with the transaction as the non-profit is only acting as a conduit for seller financing at best for seller concessions.

You said that the offer was 85K firm, but you raised the price to facilitate the seller concession for financing. Raising a sale price to provide an artificial equity amount to be carried back to show for financing purposes presents an issue. Then having the seller transfer funds (in whole or in part) that ultimately finds it's way back as the down payment, well, that's skirting on loan fraud.

The way non-profits contribute to a deal is with funds that did not originate from the deal. Your contributions are made without contingencies. Funds are, generally, made to a designated fund account to be used for a specific purpose, like assisting home buyers. Funds from donor A ends up going to another deal that may benefit donor B. Donations should be made after the closing so that they may not be considered to be anything other than at arms length. Donor commitments can be made prior to closing. The effects of the 1031 exchange has no effect on the deal other than to gains for the seller as David mentioned.

Why doesn't the non-profit purchase the property and then sell it to the end buyer? Think seller financing here.

I read somewhere that a good reply in a forum should be made with reference to experience or qualifying infromation. So, I have established non-profits as an affiliate of and independent of public housing authorities for development and to further low/moderate income housing among other missions, and have spoken on the topic at the national level at a NAHRO (National Association of Housing and Real Estate Officials) convention. I have also provided consultation on these matters to other PHAs and municipalities.

If you are wanting to set up a financing conduit, you have my number Dustin. Glad to see you thinking along these lines as a non-profit has many advantages in dealing in residential real estate transactions over other investor stratigies, and it can be very profitable. Good Luck, Bill