As the economy improves, once cautious investors are eyeing real estate as a viable income-producing vehicle. According to the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index, total returns on commercial real estate investment have been strong for the past three consecutive years. Additionally, residential construction, specifically in the high-demand multi-family sector, is experiencing a renaissance of its own as evident by the array of construction cranes popping up in major cities. While the threat of rising interest rates may weigh heavily on investor’s minds, the relatively high returns and fair degree of interest-rate and inflation protection of real estate investment may outweigh this potential risk.
Before delving head first into the real estate market, first-time investors should consider the following issues and meet with their professional advisors to help maximize returns while minimizing risks and liabilities.
Know Your Strategy
When putting money toward any new venture, investors should first examine why the investment makes sense for them. They should identify their short- and long-term goals and map out a plan that will help them achieve their intended objectives. For example, investors should ask themselves what type of property they plan to purchase, how long they intend to hold the property, what income they expect the property to generate, how they expect to earn that income and, lastly, what, if any, is their exit strategy. Answering these questions will set realistic expectations and help to determine the next steps investors can take to get started in real estate investments.
Establish the Appropriate Structure to Maximize Your Goals and Limit Liabilities
There is no one-size-fits-all structure for holding investment property. Rather, the preferred form of ownership will depend on a variety of factors, including the investor’s personal circumstances, his or her goals and a careful analysis of the legal liabilities and tax consequences of each entity. For example, limited liability companies (LLCs) allow investors to limit the risk to their capital investments and have profits and losses generated by the real estate to pass through their personal tax returns. However, when shares of LLCs are held in investors’ names, those assets become unprotected from creditors during bankruptcy and other legal proceedings. On the other hand, holding real estate in a trust or through a Single Member Limited Liability Company (SMLLC) can offer greater asset protection. Holding real estate in a trust has the added ability to distribute income generated by the real estate to beneficiaries, including family member.
Implement Beneficial Tax, Accounting and Estate Planning Strategies
There are several tax strategies available to help real estate investors increase depreciation deductions, minimize tax liabilities, maximize cash flow and, oftentimes, yield faster returns on their initial investment. Things to consider include reliance on either the cash or accrual basis of accounting, capitalizing on deductions, positively positioning gains and how investors will pass property onto future generations.
For example, the IRS allows investors to depreciate the structural components of a physical building(s) over a 27.5-year period for residential properties and 39 years for commercial real estate. However, with a cost-segregation study, investors may identify additional assets associated with the purchase, construction, repair and renovation of the property for which they may accelerate depreciation deductions over a much shorter timeframe (typically five to seven years).
Investors may realize additional deductions when they make energy-efficient improvement to the interior lighting systems; heating, ventilating, and air-conditioning systems; hot water systems; or building envelope of their properties that result in a 50 percent or more reduction in energy and power costs.
For high-income earners, there are strategies to help minimize their exposure to the new 3.8 percent tax on Net Investment Income, when they take the time to group together various investment activities in order to qualify their participation in those activities as material rather than passive. Similarly, investors with profitable rentals who spend more than 50 percent of their time and more than 750 hours working in that entity throughout the year may qualify as “real estate professionals” who may exclude rental income from the net investment income tax.
Build a Solid Team
Investment in real estate is not an endeavor for which individuals should embark lightly. It requires several skill sets and the expertise of a team of professionals who can work together to minimize risks and equip investors with an arsenal of tools and strategies that maximize their goals. This supporting staff may include realtors, real estate attorneys, mortgage brokers, insurance agents, bookkeepers, property managers, contractors and accountants – all of whom have experience with investment properties and can leverage opportunities and identify potential problems before they occur.
Berkowitz Pollack Brant has extensive real estate tax, estate planning and advisory services both domestically and abroad.
About the Author: Laurie Jennings CPA is senior manager of the Tax Services practice of Berkowitz Pollack Brant. For more information, call (305) 379-7000 or e-mail firstname.lastname@example.org.
Posted on January 28, 2014 by
The unfortunate reality of taxes is that too many taxpayers neglect the importance of proactive planning. Often, preparation and planning do not start until a fiscal year ends and tax season begins. As a result, individuals, business leaders and their advisors end up serving as historians. They look at past activities to dictate the tax strategies that might be most advantageous and least detrimental after taxpayers have already taken action. In these instances, taxpayers may miss opportunities, fail in their regulatory compliance and be surprised by a substantial tax liability for which they are unprepared.
Proper tax planning requires taxpayers and their advisors to keep a keen eye on emerging issues, regulations and changes to tax laws and make assumptions and projections based on that information. Taking the time to assess taxpayers’ unique situations and plan accordingly provides an opportunity to uncover potential benefits and risks for which taxpayers may have been otherwise unaware.
Following are just some of the important issues and developments that taxpayers should keep an eye on in 2014.
Expiring Tax Provision
More than 50 tax breaks expired on Dec. 31, 2013, creating an uncertain planning environment for taxpayers who await congressional action to possibly renew the provisions or allow the expirations to stand. Complicating any action on Congress’s part are this year’s mid-term elections and attention to the debt ceiling, which lawmakers must address in February.
Health Care Reform
Taxpayers will need to begin addressing the provisions of the ACA in 2014, if they have not done so already, and navigate cautiously to evaluate the tax incentives and penalties associated with compliance and non-compliance.
As of the writing of this article, the IRS and Treasury Department are working to finalize regulations relating to the processes and reporting requirements of the employer-shared responsibility rules of the Affordable Care Act. As a result, a significant amount of uncertainty currently exists among large employers, who will eventually need to assess the new rules and take the necessary steps to become compliant with them before the current 2015 deadline.
Defense of Marriage Act
By expanding the definition of marriage to include same-sex couples, the federal government in 2014 requires businesses to extend employee benefits, such as health insurance and FSA and HSA plans, to same-sex spouses.
Net Investment Income Tax
The 3.8 percent net investment income (NII) surtax on high-income earners that went into effect in 2013 continues to evolve in 2014. For example, there is currently no clear definition to help taxpayers differentiate between their passive and material activities in an investment and their subsequent exposure to the NII tax. Moreover, taxpayers who do not earn high incomes may be surprised to learn they too are subject to the NII tax if they generate significant capital gains form the sales of real estate, stocks and other assets.
Effective Jan. 1, 2014, businesses that own or lease buildings, equipment, machinery or other tangible assets will need to determine how they will comply with the new repair regulations, which govern how and when expenses for acquiring, maintaining, repairing and replacing these assets may be capitalized and deducted. Because of these new regulations, it would behoove businesses to review their accounting methods and capitalization policies and make changes, as needed.
Internet Sales Tax
In May, the Senate passed the Marketplace Fairness Act, which, if enacted by Congress, would compel online retailers to begin collecting and remitting sales tax on products and services they sell outside of their headquarter states.
International Tax Reform
Proposed legislation calls for imposing a one-time tax on the profits businesses hold overseas, which they may exclude from their U.S. tax returns. Additionally, taxing authorities worldwide are focusing their attention on increased documentation requirements and detailed disclosures relating to transfer-pricing agreements between domestic and overseas businesses.
Another potential challenge for taxpayers with offshore accounts is compliance with the Foreign Account Tax Compliance Act (FATCA), which goes in effect July 2014. Under the law, foreign banks must report directly to the IRS information about financial accounts they hold for U.S. taxpayers and foreign entities in which U.S. taxpayers hold a substantial ownership interest. While it appears that compliance falls solely on the shoulders of foreign financial institutions, U.S. taxpayers, banks and non-financial entities that make withholdable payments to non-U.S. entities will also need to assess their compliance activities or risk civil and criminal penalties.
Rather than perceiving accountants as number crunchers adept at reacting to past actions, taxpayers should look to their accountants throughout the calendar year and rely on their expertise, experience and ongoing counsel to guide them through a range of decisions, opportunities and challenges. Doing so can have significant long-term effects on taxes, business operations, investments and income.
The Tax Department at Berkowitz Pollack Brant provides year-round consultation, tax and estate-planning services to individuals and businesses both domestically and internationally.
About the Author: Kenneth J. Strauss CPA/PFS CFP is director of the Taxation and Personal Financial Planning practice of Berkowitz Pollack Brant. For more information, call (954) 712-7000 or email email@example.com.
In 2013, 6,434 foreign investors applied for visas under the EB-5 Immigrant Investor Program, which allows qualifying foreigners who invest in U.S. projects to expedite residency requirements.
Launched by Congress in 1990 to help stimulate job creation through capital investment by foreign investors, the EB-5 program provides investors and their family members with temporary visas in exchange for their investments of between $500,000 and $1,000,000 in new commercial projects that create or preserve a minimum of 10 full-time jobs. After two years, the investors may convert temporary visas to permanent residence status.
According to the Department of Homeland Security’s U.S. Citizenship and Immigration Services, which oversees the EB-5 program, 3,696 applications have been approved as of Sept. 30, 2013; 942 were denied. The majority of investors were Chinese nationals followed by South Koreans, who lagged by a wide margin.
Despite the record number of EB-5 application received last year, the rate of growth in program participation has decreased from 58 percent between 2011 and 2012 to five percent from 2012 to 2013.
Entrepreneurs and expanding businesses seeking to raise capital may find EB-5 financing less demanding and time consuming than that required through traditional banks and VC funding. The potential amount of investment dollars is almost limitless. However, qualifying a project for EB-5 investment is not a simple process. As the U.S. Citizenship and Immigration Services has increased scrutiny of the program, businesses and foreign investors must take the appropriate steps to seek the counsel of experienced counselors who understand all the nuances of the program and can cross every “t” and dot every “i” to ensure compliance.
About the Author: John G. Ebenger PA is a director in the Real Estate and Tax Services practice at Berkowitz Polack Brant. For more information, call (561) 361-2100 or e-mail firstname.lastname@example.org.
On January 16, after having endorsed the consensuses of the Private Company Council (PCC), the Financial Accounting Standards Board (FASB) issued alternatives to help private companies account for goodwill and interest rate swaps in a more simplified and less costly manner than what is currently required under U.S. GAAP.
Goodwill is an intangible asset represented by the gap that exists between the purchase price and fair market value of a company and its assets and liabilities. Under the new FASB rules, private firms may amortize, or reduce, goodwill on a straight-line basis over a period of 10 years or less. Additionally, the new rules allow private companies to conduct a simplified impairment test to determine the need for write-downs on goodwill only when a triggering occurs and indicates the business’s fair value is below its carrying amount. Public companies must test for impairment each year.
The new rules also provide private entities, other than financial institutions, with the ability to use a simplified hedge accounting approach to account for interest rate swaps entered into when converting variable-rate interest payments to fixed-rate payments.
Consult the professionals at Berkowitz Pollack Brant to determine the best ways public and private companies may comply with changing accounting and audit regulations.
About the Author: Hector E. Aguililla, CPA, is associate director of audit and attest services with Berkowitz Pollack Brant. For more information, call (305) 379-7000 or email email@example.com.
The IRS’s Exempt Organizations Office recently made available to charities and nonprofit organizations an online form they may use to apply for recognition of exemption from federal income taxes under 501(c)(3) and its associated schedules.
The IRS expects Interactive Form 1023 to improve applicants’ abilities to complete the form by including pop-up boxes that explain application questions and offering links to related information located at www.IRS.gov.
Before getting started, applicants may visit www.StayExempt.irs.gov to print a checklist of information and documents they will need to have on hand to complete the form. Once completed, the application may be printed and mailed with attachments in the same manner that applicants submitted the standard Form 1023.
About the Author: Adam Cohen is associate director of the Tax Department at Berkowitz Pollack Brant. For more information, call 954-712-7000 or email firstname.lastname@example.org.
Before the New Year, the IRS issued new guidance regarding the tax treatment of same-sex couples following the Supreme Court’s Windsor ruling, which struck down the key provision of the Defense of Marriage Act (DOMA).
Highlights of the recent changes to IRS rules include:
•Same-sex couples may now make mid-year elections to retroactively enroll their spouses in cafeteria plans, such as Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). The election to do so may occur only when the plan participant was lawfully married as of the Court decision on June 26, 2013, or when there has been a change in legal marital status from that date until Dec. 16, 2013.
•A plan participant who paid the cost of medical coverage for his or her same-sex spouse on an after-tax basis, may begin treating those costs on a pre-tax basis, as long as the participant informs his or her plan sponsor before the end of the plan year.
•FSA plans will now cover expenses incurred by a same-sex spouse, if the expenses were incurred no earlier than the beginning of the plan year or the date of marriage.
The 2013 maximum annual deductible contributions of $6,450 to one or more HSAs for married couples also applies to same-sex couples.
About the Author: Edward N. Cooper CPA is a tax director in the LGBT Businesses and Families practice of Berkowitz Pollack Brant. For more information, call (305) 379-7000 or e-mail email@example.com.
Posted on January 09, 2014 by
Effective January 1, 2014, the maximum amount of earnings subject to Social Security tax increases to $117,000 from $113,700 in 2013. The employer and employee Social Security tax rate remains unchanged at 6.2 percent, as does the Medicare tax, which remains at 1.45 percent. However, individuals with earned income of more than $200,000, or $250,000 for married couples filing jointly, will continue to pay the additional 0.9 percent in Medicare taxes implemented last year, which employers will not match.
Additionally, with the New Year, Social Security and Supplemental Security Income recipients will gain a 1.5 percent cost-of-living increase in the benefits they receive.
Due to the October government shutdown, the IRS has announced it will delay the date it will begin processing 2013 tax returns.
According to the IRS, the 2014 tax filing season will officially begin on Jan. 31 for individuals and businesses that report their income on federal form 1040. While this date represents the first day the IRS will begin accepting electronically- and paper-filed returns, it does not mean taxpayers should hold off on gathering information, preparing documentation and meeting with their tax advisors. Returns will still be due on April 15, the traditional tax deadline set by statute.
Those taxpayers who need more time to file their returns may request an automatic six-month extension. However, it is important to note that an extension does not postpone the April 15 deadline for which taxpayers must pay their taxes.
No matter when taxpayers choose to file their returns, Berkowitz Pollack Brant advises its clients do so electronically, via e-file and direct deposit, in order to yield much faster receipt of tax refunds from the government.