10 tax tips for the real estate industry Helping you manage your tax burden Real estate developers, owners and investors face complex tax issues that can strain resources and drain profits. Grant Thornton LLP’s tax professionals offer 10 tax tips that can help you manage your tax burden. 1. Understand your partnership or LLC agreement. Do you understand your partnership or LLC operating agreement? Do you know if the allocations among members have “substantial economic effect”? Do you know what a qualified income offset provision is? Do you understand minimum gain? In real estate matters, operating agreements typically address these and other important tax issues. Chances are your agreement is written with such issues in mind. 2. Consider tax consequences of distributing appreciated property out of a partnership. Property held for sale that has substantially appreciated in value is a “hot asset.” Ordinary gain can be triggered on the distribution of a hot asset, and careful tax planning is recommended prior to such a distribution. © 2008 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd 3. Maintain three sets of partnership books. If your entity is a partnership, are you maintaining three sets of books? If not, you may not be following the required tax rules and your allocations among partners may not be valid. 4. Determine if you are a dealer or an investor. Do you know your status as Why Grant Thornton? Real estate industry practice professionals have maintained a career focus on real estate clients. Our group has extensive experience in financial and business matters with an uncompromising commitment to professional excellence. either a dealer or an investor for tax purposes? Proper planning upfront will ensure the desired treatment upon disposition of the property. 5. Allocate land cost to your benefit. To defer income upon the sale of parcels from a tract of land purchased, proper allocation of the cost among the various parcels must be done. The IRS requires that the cost be “equitably apportioned.” But how? There are several methods available that should be considered when allocating cost. 6. Evaluate your capitalization methods for pre-construction costs. Are you capitalizing direct and indirect costs on property that is held for future development? Are you capitalizing property taxes incurred if it is reasonably likely that the property will be developed? If not, you may not be following the To learn more about services offered by Grant Thornton's Real Estate industry practice, contact: Tom Novosel National Managing Partner, Construction, Real Estate and Hospitality industry practice T 312.602.8100 E Tom.Novosel@gt.com required tax rules and the deductions you are taking could be disallowed. 7. Exchange real estate for a “bond”. Would you like to cash out of real estate, but defer your gain? Generally the only way to defer gain long-term is to exchange into more real estate. However, you may be able to affect the tax consequences by exchanging into real estate that has the attributes of a bond. 8. Take full advantage of depreciation. Has your company recently undertaken new construction projects, expansions or renovations? Substantial long-term savings could result from a cost segregation study that categorizes your assets into the appropriate and most tax-advantaged depreciable lives. 9. Consider yourself a manufacturer. As a real estate owner, do you also consider yourself a manufacturer? Perhaps you should. The final regulations for the I.R.C. Section 199 Domestic Production Activities Deduction may apply to some activities for companies within the real estate industry, including construction companies, homebuilders, and engineering and architectural firms. There may be an unexpected tax benefit for you. 10. Reward key executives. Do you have key executives that you would like to give a piece of “the action” as a member of your real estate partnership? If structured properly, this may be accomplished without immediate income recognition by these executives. © 2008 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd Tax professional standards statement This document supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.