The “R” word (recession) is back in vogue. The current economic climate marked by rising interest rates, bank failures and consequential stricter lending standards, is putting a damper on economic activity. Economic downturns have a direct correlation with debt servicing. This article takes a bird’s-eye view of the tax implications of troubled debt in the real estate sector. The tax consequences of debt cancellations or modifications depend on whether the debt is recourse (borrower personally liable) or non-recourse (secured only by property). This article references only non-recourse debt.
On January 1, 2024, the Corporate Transparency Act (CTA) went into effect. The CTA requires businesses, including real estate businesses, to file a Beneficial Ownership Information (BOI) Reports with the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Such reports identify (1) the beneficial owners of the entity and (2) the individuals who filed an application with a government authority to create the entity or register it to do business. The CTA is designed to prevent and combat money laundering, terrorism financing, corruption, tax fraud, and other illegal activities.
Uncertainty and concerns about the New York commercial real estate market abound. Office vacancy rates are at close-to if not at all-time highs. The pandemic-induced work-from-home mode has become the new reality and interest rates have seen a steep surge to levels not seen in many years. Each of these situations alone is a challenge but together they feed into each other causing the “perfect storm”.
Empty office buildings. It’s nearly three years since the “return to work” predictions began. However, for quite some time now desks remain empty, floors remain empty, offices remain empty and buildings remain empty. Tenants no longer have the same space requirements and are downsizing. Other tenants are moving to new space and downsizing.
We have always heard that in life the only two things for certain are death and taxes. This may be true but the more accurate point regarding taxes is that there is constant change. In this article we will focus on a change impacting many and is effective for 2021. The change involves the Excess Business Loss (EBL) limitation.
A Section 1031 exchange of like-kind real estate (1031 exchange) allows the seller to defer the recognition of capital gain taxes and depreciation recapture for federal income tax purposes. However, the taxpayer’s ability to defer tax at the state level depends on the state in which the real estate is located. While most states follow the federal rules and allow 1031 Exchanges, the Commonwealth of Pennsylvania does not recognize 1031 exchanges. Several states have “claw-back” provisions if the original relinquished property was sold in one state and the replacement property acquired in a different state is later sold. Lastly, taxpayers need to be mindful of state income tax withholding requirements in states where the seller is a non-resident.
The Tax Cuts and Jobs Act (TCJA) limits an individual’s deduction for state and local taxes (the “SALT limitation”) to $10,000 for tax years beginning after December 31, 2017 and ending before January 1, 2026. The Conference Committee report accompanying the legislation indicated that “taxes imposed at the entity level, such as business tax imposed on pass-through entities, that are reflected in a partner’s or S corporation shareholder’s distributive or pro-rata share of income or loss on a Schedule K-1 (or similar form), will continue to reduce such partner’s or shareholder’s distributive or pro-rata share of income as under present law.”
For the purposes of the qualified business income deduction (QBID), the Internal Revenue Code and proposed regulations issued in August did not make clear if rental real estate is a trade or business and, therefore, whether it qualifies for the QBID. The Internal Revenue Service provided some additional guidance by issuing in early 2019 a proposed version of a revenue procedure in Notice 2019-07 that contained a safe harbor for treating a rental real estate enterprise as a trade or business solely for purposes of Section 199A.
Much has been written and discussed about the Tax Cuts and Jobs Act signed by the President on December 22nd, 2017 which made significant changes to deductions for business interest paid or accrued post December 31st, 2017. From the time these changes were first enacted in 2017, to the publication of proposed regulations on December 28th, 2018, professionals had to delve into the myriad of cross references, legislative history and amendments to discern the ultimate meaning of these rules. Throughout most of this time you had the certainty of knowledge of the law as much as shaking a Magic 8 Ball and asking the question “Is this interest ultimately deductible and what is the tax effect?”
For taxable years beginning in 2018, the Tax Cuts and Jobs Act (TCJA) signed by the President last year added a new limitation on the ability of taxpayers other than C corporations to deduct business losses.
The determination of the appropriate UOP is the first step in determining the need to capitalize an expenditure related to real property. Once the UOP is determined, the new improvement standards from the final regulations can be applied. Many real estate businesses will need to file an accounting method change (filing Form 3115) to adopt the new UOP rules as they apply to their buildings.
When a taxpayer is faced with a pending foreclosure or a deed-in-lieu sale on investment or trade or business property, the taxpayer may be faced with a potential taxable gain when the property is “underwater.”
The IRS on October 5, 2016 published final (TD 9787), temporary (TD 9788), and proposed regulations (REG- 122855-12) providing guidance on the allocation of partnership liabilities under Section 752. The government also reproposed certain Section 752 regulations by introducing a new anti-abuse rule.
Internal Revenue Code Section 708(b)(1)(B) popularly known as technical termination of a partnership is distinguished from actual termination or end of the partnership (§708(b)(1)(A)). Thus, for federal income tax purposes, a partnership may technically terminate even though it actually continues to exist.
Rick Kaplan of the New York Real Estate Journal sits down with an interview with Sandy Klein. Sandy is a CPA at Shanholt Glassman Klein Kramer & CO. A seasoned veteran at the firm and one of its most prominent leaders, Sandy joined SGKK in 1980. Sandy contributes articles regularly to the New York State Real Estate Journal and has done extensive lecturing on tax and business matters impacting the real estate sector.