Set forth below is an outline prepared by my partners, David A. Lawrence and Donald N. Goldrosen, that contains helpful information for clients working and investing in real estate.
Lessons Learned and Tax Planning Opportunities for Home Builders
Home builders have been through Hell and hopefully are on the way back. During this Great Recession the companies that have survived have down-sized their workforce, cut their G&A expenses, restructured their debt, shed excess land holdings, and moved into related diversified businesses. Here are six messages that came out of this mess as we look forward to hopefully some decent recovery:
● These experiences reinforced the use of separate LLCs or separate S corporations for each project. Maintaining the separate silos helped: (1) deflect the magnitude of construction defect litigation, (2) limit warranty claims morphing into class actions, and (3) free up bonded projects. Going forward we still advise clients to keep using these separate LLCs. Be careful to respect the separateness of these LLCs.
● In setting up a new brother-sister entity for a particular project, one of the most important tax decisions is your choice of tax accounting method for that project. Will it be the basic accrual method, the long term contract percentage of completion method, or the long term contract home construction contract method? Depending upon the project, one method may better match expenditures with deductions and cash with revenue. One size does not fit all.
● Be sure that you are taking the extra 9% domestic production deduction under Section 199 of the Internal Revenue Code. Besides traditional widgets and other property, this special deduction is eligible for construction on real estate located in the US. It is essentially an extra bonus deduction. Note that it is also eligible for engineering and architectural services provided in the building trade industry.
● If you have been holding land for a future building, and that land has started to come back in value and therefore has some built-in profit, consider "selling" that land to a semi-related S corporation in order to convert ordinary income into capital gain.
● If you are holding property that was acquired just before asset values tanked, consider taking advantage of extraordinary gift and estate tax opportunities to remove as much as $5 million ($10 million for a married couple) of property from your taxable estates before 2013, when 55% gift and estate tax rates return for assets exceeding $1 million. You can do that at the same time that you preserve the high tax basis in the property to reduce future gain.
● Be aware of new pro-lender loan documents that require NOL tax benefits of LLCs and S corporations to be used for the lender’s benefit rather than going to the owners of the companies. If you are stuck with this provision, be sure that any NOL benefit is subject to any final adjustments by the IRS; otherwise you may find yourself paying a higher benefit to the lender in addition to losing the benefit of the NOLs accumulated over the past few years.
We are living in interesting times. If we can use our considerable experience at OF&P to help structure and grow your businesses, please call any of our lawyers. Don Goldrosen & David Lawrence on behalf of the OF&P Real Estate Practice and Tax Practice Groups.
