Accounting Tips: Finding the Silver Lining in the Real Estate Decline
By Lloyd F. Sweet, Jr., CPA -- Eide Bailly LLP
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The U.S. and global economies have been in turmoil for close to 24 months now. There are differing views as to whether we are coming out of the recession, or headed for a double-dip recession. I will leave those forecasts to the economists! One thing is certain: we will all experience a number of significant tax law changes in the next several years.
The last 24 months have seen not only a tumultuous economic ride for individuals and businesses, but also a significant number of tax law changes that will impact us all in the near future. Although some changes will provide more opportunities, in most cases, businesses will be paying higher taxes. As business owners and investors, you should be aware of the direction of these changes so that you can be proactive in planning. What follows is a summary of the more important changes that will affect you in the next one to three years.
You should meet with your professional advisors to mitigate the effects of these changes on your businesses and your individual situations.
Despite the otherwise gloomy economic outlook, there are some positives to consider in today’s real estate market, primarily in the area of new regulations, extensions of old, beneficial provisions, tax saving opportunities and buying/investment opportunities; and in the area of the latest hot topic: renewable energy and energy efficiency.
Some items to consider:
Estate Tax Law
Current estate tax law provisions are set to expire in 2010, but will likely be expanded to a
$3-5 million exclusion from the current $2 million. On the downside (we never said it was all good!), valuation discounts may disappear, making property transfers more costly. But the decrease in real estate values and potential elimination of valuation discounts may provide an opportune time to consider restructuring or transitioning entities and interests in entities that hold real estate, and transferring real estate to other family members as part of an estate planning opportunity.
Taxable Income
Taxable income may or may not be a significant consideration today, but there may be a benefit in creating or expanding a loss to be carried back, thus generating a refund. Loss carry back rules have been liberalized under new laws.
Bonus Depreciation
Bonus depreciation has been extended for one year: 50% of new personal property can be expensed in the year of acquisition. Section 179 deduction has been extended for one year: up to $250,000 of new personal property can be expensed in the year of acquisition (up to taxable income).
Cost Segregation
This may still be a viable consideration in light of the bonus depreciation and section 179 deduction. Using Cost Segregation, depreciated useful lives are shortened from 27 ½ and 39 years to shorter lives of 5, 7 and 15 years. This provides greater depreciation/expense in the earlier years and an opportunity to deduct a “catch-up” for property placed in service in prior years.
Multi-Family Properties
In the area of multi-family housing and historic preservation, recent tax law changes have increased and/or extended tax credits in certain areas (4% and 9% federal tax credits) set to expire, but now extended, are available for qualified, low income housing. Historic credits of a 20% federal credit for qualified rehab expenditures are still in place if your project qualifies (full credit claimed in the year when the property was placed in service, with a five year period during which improvements need to stay in place). Extending these credits may enable investors to offset some of the financing costs of developing an historic or multi-family housing project.
Renewable Energy Credits
With the growing focus on energy efficiency and renewable energy production, some renewable energy credits set to expire have been extended, and other new accelerated deductions are available to encourage activity in energy efficiency.
In the commercial arena, there is a 30% federal credit available for solar energy generation. State and local credits as well as state and local incentives are also available. Substantial local utility rebates are available to offset the costs of constructing the property, and similar credits are also available for other renewable energy production activities.
In the residential arena, individual homeowners are allowed a non-refundable federal tax credit (REEF-residential energy efficient property credit of 30% for qualified solar electric, solar water heating, fuel cell, small wind energy and geothermal heat pump property placed in service before 2017). Certain limits apply to the credit but there is no dollar limit for solar electric property after 2008. Developers may also have opportunities to utilize these credits as an enhancement to commercial development projects.
The Energy Policy Act (EPAct) provides energy tax incentives for “energy efficient building projects” including lighting and/or HVAC and/or building envelope for new construction and existing buildings. The law now allows an immediate deduction for certain energy efficient expenditures instead of depreciating the costs over 27 ½-39 years. Accelerated deductions are now available to owners of nongovernmental buildings.
Government building designers also score with EPAct. Credits on government buildings are available to the primary designer to encourage ‘green’ design in the government building sector.
Deductions are based on improvements over established standards (ASHRAE 90.1 2001). Colorado’s standard is higher so all projects qualify. Energy efficient improvements must be depreciable assets (this converts the 39 year depreciation to current deduction). The deduction is available for installations completed between 1/1/2006-12/31/2013, and is the lesser of the total cost or $1.80/sq ft for a whole building, or $.60c/sq. ft for individual systems such as lighting or HVAC/building envelope.
Substantial credits exist for new construction and for improvement of existing facilities. These credits can add the benefit of a more efficient facility; and in some cases, payback for the additional construction costs or retrofit can be obtained in less than two years, considering energy savings and the credit benefit.
LEEDS Certification
Leadership in Energy and Environmental Design (LEEDS) is another ‘hot’ area for developers, and certifies that a building is at a level of energy efficiency that is compliant with energy efficient building practices.
As the real estate and construction market recovers, there will be opportunities to utilize these credits in constructing more efficient properties, as there is now a significant current benefit to retrofitting existing properties.
Author Credit: Lloyd F. Sweet, Jr. is tax and real estate partner at Eide Bailly LLP, CPAs and Business Advisors. He can be reached at 303-986-2454 or lsweet@eidebailly.com |
