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10 smart moves for real estate investors and operators at year’s end

ARTICLE | November 17, 2022 | Authored by RSM US LLP

In the past year, commercial real estate has seen a dramatic rise in interest rates and a tempered slowdown in transactional activity. 2023 will provide an opportunity for well-positioned organizations to take advantage of the right avenues. Real estate owners and investors must make wise decisions now to be ready for next year.

As we close the books on 2022, here are 10 important year-end resolutions:

1. Keep REIT distributions on target

Now is the time to review distributions from your real estate investment trust. Have you met the dispersal requirements for 2022?

Here are some suggestions if your REIT hasn’t yet hit the distribution mark >

2. Use it or lose it: 100% bonus depreciation

Assets placed in service before Dec. 31 remain eligible for 100% bonus depreciation from the Tax Cuts and Jobs Act of 2017. Starting in January, the allowance drops to 80%, so it pays to act quickly.

Cost segregation studies can be particularly helpful in accelerating depreciation deductions. >

3. Watch out for disappearing interest deductions

Businesses that did not make the real property trade or business election have benefited from the interest limitation calculation adding back depreciation and amortization, allowing for more interest deduction. This changed starting in 2022, as the deduction for depreciation and amortization is no longer added back; this means businesses may need to adjust their projected taxable income for the year.

4. Don’t pass up tax-saving opportunities

Be prudent in reviewing your pass-through entity tax options and elections. Many states have opened up the opportunity for businesses to pay state taxes rather than having to withhold them on behalf of their partners. These payments have the benefit of being deductible by the business rather than capped at the individual level. Some states require an election to opt in before the end of the year.

Stay up to date on the pass through entity elections available at the state level. >

5. Leverage technology to maximize your tax function

Leveraging technology is key to maximizing your tax data and attributes; more structured data will allow for better decision-making and turn your tax function into a value-creation center. For example, in the current inflationary environment, tax attributes (like depreciation or net operating losses) lose value as the nominal value of a dollar decreases.

Look for opportunities to take advantage of these attributes before the value declines. >

6. Harvest your losses

While the stock market has had a rough year, losses are only recognized for tax purposes after you sell your investment. Locking in these losses will reduce your tax liability for the year; however, be aware of the wash-sale rules if you want to repurchase the stock.

7. Be wary of debt modifications

Note that rising interest rates may push borrowers to look for ways to alter the terms of their debt. While the economic or cash flow benefit may be vital, borrowers must also consider the tax ramifications of cancellation of debt income.

Take a full view of debt workouts and restructurings before you act. >

8. Know the risks of investing abroad

A strong U.S. dollar means greater buying power internationally; however, the decision to invest globally should not be taken lightly. Involve your tax advisor early and often to structure your investments appropriately and minimize tax leakage.

Location is always important, but there are other factors to consider. >

9. Time to dust the cobwebs off your valuation policy

With interest rates up and transaction activity down, valuing your properties may not be as straightforward as in past years. Before you mark up or down your assets for year-end, stress test your valuation methodology to be sure that it still makes sense in the current market.

Valuation in a volatile environment requires added focus and fresh perspective. >

10. Reduce your carbon footprint and your tax liability

The Inflation Reduction Act extended energy-related tax breaks and indexed for inflation the 179D deduction for energy-efficient commercial buildings. These new rules go into effect on Jan. 1, 2023.

Can you take advantage of energy and excise tax savings in the new year? >

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This article was written by Scott Helberg and originally appeared on Nov 17, 2022.
2022 RSM US LLP. All rights reserved.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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