When approaching each transaction, real estate professionals anticipate to achieve the best possible outcome. The property’s net operating income (NOI) is often the first metric they will assess in determining whether an investment is going to generate cash inflow. However, this metric will not be enough for a savvy investor. In most cases, investors need to evaluate the property’s highest and best use. This article discusses the fallbacks of NOI, as well as introduce two alternative financial metrics worth considering when investing in real estate property: Net present value (NPV) and internal rate of return (IRR).
Although the final property repair regulations have been in effect since 2014, the question we still are asked most is how a property owner can tell the difference between a repair and an improvement to a unit of real estate. Stated differently, which costs can be deducted, and which must be capitalized and depreciated? This article focuses on the Small Taxpayer Expensing Election and the Small Taxpayer Safe Harbor Rule which allows a “qualifying small taxpayer” to treat costs as deductible expenses. We will also look at the other safe harbors applicable to real estate: The Routine Maintenance Safe Harbor and the De Minimis Safe Harbor.
As the real estate market has improved in many parts of the United States, and interest rates are poised to climb in the near future, many property owners are considering pursuing defeasance to exit their loans. Many, however, do not really understand what is involved. This article provides input on how defeasance works and when it is best to use it.
In today’s volatile real estate market, it is often difficult to obtain a meaningful estimate of what a parcel of commercial real estate is currently worth. This article discusses how taxpayers can deal with distressed sales and rely on comparables to arrive at the best estimate.
The passive activity loss rules can become a huge roadblock for taxpayers involved in rental activities. This article discusses a case that demonstrates how work done as an employee can help qualify a taxpayer for the benefits of the real estate professional exception.
If a taxpayer owns both property and a business, it just makes sense to lease the property to the business, right? Not always. This article highlights how this approach could bring on some dire tax consequences.
Leverage, which is simply using borrowed money to make an investment, allows real estate investors to afford more expensive properties than they could with just their own equity. And, unlike dividends, interest payments are tax-deductible, further reducing the cost of debt. This article shows that leveraging can be a balancing act — you don’t want to overleverage and put yourself at undue risk, but you also don’t want to underleverage and miss out on strategic investment advantages.
A big question we see in the tax realm is: “When can I start depreciating my building?” Conventional wisdom says to start depreciating your retail property once it is open for business. However, a recent court ruling sheds new light on the issue. In this article, we examine the meaning behind the term “placed in service” and analyze the tax court case Stine LLC v. U.S., No. 2:2013cv03224, Jan. 27, 2015 (W.D. La.). In the case, the IRS ruled that a taxpayer’s building could not be considered “placed in service,” as its retail properties were not yet in operation. However, the tax court disagreed with the IRS and had their own interpretation on what “placed in service” means. Read further as we examine this case in greater detail, as it provides additional guidance on when a real estate property can start being depreciated.
Smart buildings are bringing dramatic changes to the real estate industry. As owners and investors begin exploring how these technologies can help them and their bottom lines, they will likely jump on the proverbial bandwagon sooner rather than later. This article explains that, while smart buildings typically provide some green benefits (that is, benefits related to energy and sustainability), they also go beyond energy efficiency to address operational issues — such as building and equipment performance and maintenance — that, in turn, allow better capital planning.