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
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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.