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Six tips for structuring real estate deals to minimize tax

May 19, 2014

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Real estate developers, you work in an environment where your ability to arrange deals hangs on the transaction’s tax consequence. If it can’t be structured in a way that’s advantageous to you and your investors, the project won’t happen.

Whether you are putting together new development projects, public or private syndicated partnerships, or joint ventures, the deal’s tax bite can be a make-it or break-it factor. So you want to be strategic as you consider the opportunities on your horizon. When it comes to structuring your deal, take advantage of every tax-minimizing weapon in your arsenal.

The alternative’s not pretty

In our years of working with the real estate industry, we’ve witnessed the frustration that results from projects that never find a profitable avenue forward. And we’ve seen equal aggravation caused by deals that went through, but were unnecessarily overburdened by tax liabilities.

It doesn’t have to be that way. Consider these six tips to minimize the tax consequence of your next deal.

1)   Plan ahead. One critical rule to keep in mind is the importance of tax planning very early in the negotiation process. The tax structure of a transaction has a direct bearing on the purchase price and other essential economic variables of the deal.

Without a clear understanding of the tax issues and the tax consequences of different alternative structures, the parties cannot intelligently negotiate the key terms of the deal. When the parties attempt tax planning after reaching an agreement, it is often too late to repair the damage.

2)   Know your ultimate exit strategy. Knowing how you’ll ultimately exit the project is crucial during the purchase. Exit strategies should always be kept in mind when evaluating alternatives.

In fact, a familiarity with the various exit options and how they relate to your structure can lead you to decisions that save thousands of dollars. You’ll want to factor in your short and long-term goals, the purchase price, how you’ll allocate the purchase price, the value of the property, the location of the property and the likely future cash flows.

3)   Negotiate the terms. A successful transaction is contingent upon effectively negotiating the form of consideration and the terms of the transaction. Consideration can take numerous forms such as cash paid at closing or over a period of time, notes, stock, convertible instruments, options, etc.

4)   Know the steps.It is important to consider the type of acquisition as there are significantly different tax outcomes depending on the form of the transaction. In general, if the transaction is structured as an asset acquisition, the acquirer will receive a higher tax basis in the assets. Alternatively, if the transaction is structured as a stock sale the tax basis in the assets remain unchanged.

5)   Recapture depreciation. Parties to a transaction should remember the depreciation recapture rules, which can have a significant tax impact to sellers of property. These rules generally state that any gain attributable to previous depreciation deductions will be taxed at higher tax rates to the seller. There are numerous pitfalls that parties should be aware of, depending upon the type of asset being sold.

6)   Consider an alternative. An alternative transaction is a “tax-free” deal which generally involves reorganizations. These can be similar to taxable deals. But with reorganizations, the acquirer uses its stock as a significant portion of the consideration paid to the seller, rather than cash or debt.

The above steps can be made easier if they are strategized and executed by an experienced advisor. If you are looking to work with a firm, put a priority on one that has a robust team dedicated to the real estate sector.

At CSH we’ve helped some of the area’s most prominent real estate developers see higher profits, excellent cash-flow and attractive taxing situations. We advise clients on the unique tax opportunities written specifically for the real estate industry, while taking care of necessary reporting and compliance.

© 2014

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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