20 March 2024
Tax Planning Strategies for Real Estate Investors and Developers
Against the backdrop of evolving market dynamics, including realignment, fluctuating interest rates, and changing workplace norms, investors approach 2024 with cautious optimism regarding their real estate portfolios. The preceding year witnessed a tempered pace of acquisitions as market uncertainties led investors to adopt a more observant stance, anticipating a reconciliation of property values and interest rates. Those who found profitability in their real estate ventures in 2023 did so by adeptly leveraging available incentives, such as tax credits, opportunity zone programs, and municipal grants, which proved instrumental in mitigating broader market pressures.
As the real estate market continues to recalibrate in 2024, there are distinct opportunities emerging in tax optimization strategies, sustainability initiatives, and technological advancements. In this article, we delve into key tax legislation under consideration and explore avenues for investors to strategically position their real estate investments for success.
Current and Proposed State of Cost Recovery
Given the persistent flux in tax regulations, it's imperative for investors to stay abreast of developments and tailor their strategies accordingly. Notably, the House on Jan. 31, 2024 passed the Tax Relief for American Workers and Families Act, awaiting further action in the Senate. If enacted, this bill would reinstate several business-friendly provisions that had lapsed.
Outlined below are key highlights regarding the current and proposed state of cost recovery:
R&D Expensing
The proposed bill seeks to temporarily restore and retroactively apply full expensing for domestic research and development (R&D) activities for the 2022 and 2023 tax years, extending through 2025. This contrasts with current law, which mandates a five-year amortization period for domestic expenses and a 15-year period for foreign expenses.
Also Read: Key Financial Reports for Real Estate Businesses: Explained
Bonus Depreciation
Similarly, the proposed legislation aims to reinstate 100% bonus depreciation for qualifying property, retroactively applying full expensing for assets placed in service from 2023 through 2025. Presently, companies can only deduct 60% of qualifying property placed in service before the end of 2024, with deductions phasing out until 2027.
While these measures represent positive strides, achieving sustained economic growth necessitates more permanent solutions rather than temporary policy reinstatements.
Net Interest Limitation – Section 163(j)
The proposed legislation also endeavors to provide businesses with a more favorable calculation of adjusted taxable income (ATI) for interest expense deductions under Section 163(j). It would retroactively restore a business’s ability to deduct interest expense of up to 30% of ATI using the EBITDA calculation for tax years 2024 and 2025, with an optional application for 2022 and 2023.
Creating Value through Sustainability
Sustainability initiatives present compelling avenues for value creation in real estate. By embracing these initiatives, investors can not only reduce operating expenses but also gain a competitive edge, enhance property valuation, and access attractive tax incentives.
Energy-Related Tax Credits
The Inflation Reduction Act of 2022 introduced significant incentives to promote investment in energy-efficient projects, including the expansion of the Section 45L tax credit. This credit rewards developers of energy-efficient homes, offering substantial tax savings for builders of qualified projects. To qualify for the maximum credit, contractors must adhere to stringent criteria, fostering a drive towards greener building practices in the real estate sector.
Also Read: The Role of Accounting in Real Estate: Beyond Bookkeeping
The Impact of the Corporate Transparency Act on Real Estate
The Corporate Transparency Act (CTA) has implications across industries, particularly in commercial real estate, where complex ownership structures are prevalent. To enhance transparency, owners will be required to file a Beneficial Ownership Information Report with FinCEN, affecting entities involved in real estate transactions. Compliance deadlines vary based on entity formation dates, necessitating careful attention and legal guidance.
Stay Informed with Gallagher & Mohan
As the real estate landscape evolves and tax legislation undergoes deliberation, staying informed is paramount. Gallagher & Mohan stands ready to provide expert guidance on planning opportunities and effective tax strategies tailored to optimize real estate investments and navigate regulatory changes. For personalized assistance, contact our office at +1 (339)-793-3492 to connect with a specialist in our real estate practice.
Conclusion
The real estate market in 2024 is characterized by a blend of cautious optimism and strategic foresight. Investors are navigating a landscape shaped by market realignment, fluctuating interest rates, and evolving workplace habits. While the preceding year saw a measured pace of acquisitions amidst uncertainty, savvy investors capitalized on available incentives to bolster profitability.
Looking ahead, opportunities abound in tax optimization strategies, sustainability initiatives, and technological innovation. Key legislative proposals offer potential avenues for cost recovery and enhanced profitability, albeit amidst a backdrop of ongoing regulatory flux. Sustainability remains a focal point, with energy-related tax credits incentivizing green building practices and driving value creation.
However, the regulatory landscape is evolving, as evidenced by the implications of the Corporate Transparency Act on real estate ownership structures. Compliance with reporting requirements necessitates careful attention and legal guidance.
In this dynamic environment, staying informed and seeking expert counsel are essential for investors seeking to optimize their real estate asset management. By embracing strategic approaches, leveraging available incentives, and adapting to regulatory changes, investors can position themselves for success amidst the shifting currents of the real estate market in 2024 and beyond.
