Real estate investment firms use tax strategies like cost segregation, 1031 exchanges and Delaware Statutory Trusts to maximize returns. Yet, proposed 2025 tax changes may limit 1031 exchanges, and outcomes of the upcoming election could alter these strategies further.

Facing evolving tax rules, 95% of businesses plan to co-source their tax and finance operations in coming years in order to stay compliant and efficient.

To understand current tax trends and future impacts, Agora attended an expert panel session on regulatory compliance and tax considerations at the IMN CFO & COO Forum. Here are the key insights:

Table of Contents

• Panelists
• Expiring tax provisions
• Tax deferral strategies
• Tax management strategies
• Outsourcing vs. insourcing tax functions
• Planning for future tax changes
• Key takeaways

Michael Hurwitz, Partner, Withum, moderated the panel discussion focused on tax trends and the coming election. Panelists included:

• Dennis Theodossis, Partner, Real Estate Practice Leader, Forvis Mazars US
• Trent Wallin, CFO, Peak Capital Partners
• Dee Estep, Principal, Texas Real Estate Leader, CLA
• Eric Brecher, EVP, CDEC
• Jay Blaivas, Tax Partner, Crowe

The panelists kicked off the discussion with expiring tax provisions and their potential impact:

• Bonus depreciation: TCJA bonus depreciation is going away, but some speakers mentioned limited impact since they’ve been using Tangible Property Regulations instead.
• SALT (State and Local Tax) Cap: If the $10,000 SALT cap expires, it could affect multi-state real estate deals and require restructuring of projects and entities. The speakers mentioned that many states developed pass-through entity (PTE) tax elections to work around the SALT cap.
• Expiration of 2% AGI floor: Firms found a workaround for the 2% AGI floor on miscellaneous itemized deductions. Instead of claiming legal and management fees as personal deductions, they treated them as property expenses. This strategy allowed investors to deduct these costs as rental losses and avoid the 2% AGI limitation. Now that this tax rule is expiring, firms may need to reconsider this approach.

Panelists shared their thoughts on key real estate tax deferral strategies, including:

1031 exchanges remain a key tax strategy and one panelist mentioned they generate about $19 billion annually in taxes and support approximately 1 million jobs. This tax strategy promotes re-investment and can also involve less debt, which reduces risk in the overall market.

The speakers pointed out that this strategy isn’t just for properties with positive equity. Even with underwater or foreclosed properties, investors can use 1031 exchanges if lenders forgive the debt. This allows owners to defer taxes on the forgiven amount.

There’s also a growing popularity of reverse exchanges, where investors buy replacement property before selling existing assets.

The panelists mentioned that some investors use DSTs as part of a strategy to gain more flexibility later. Popularity of this approach continues to grow with investors creating over 2500 DSTs alone in 2023. Once established, they can potentially convert their DST investment into partnership units, which could be easier to sell in the future.

With 721 exchanges, property owners trade their real estate for partnership units and defer capital gains taxes. This provides diversification and potential liquidity if investors sell units later. Some deals let owners get the property back if the partnership wants to sell, so they can still leverage a 1031 as an option.

The discussion also included perspectives on managing taxes:

The panelists discussed the renewed importance of Tangible Property Regulations (TPR) as bonus depreciation phases out. They emphasized revisiting TPR since it allows for expensing more versus capitalization.

One panelist said, “I think it’s time for all of us here, if you’re a CFO or a taxpayer, to wipe off the tangible property regulations. They’re beautiful. Everything’s a repair.” They mentioned that TPR provides opportunities to expense items like roof repairs, which can’t benefit from bonus depreciation.

A panelist mentioned the relevance of cost segregation studies for new construction and development. These studies help carve out depreciation in new projects, which can enable investors to claim 100% depreciation on certain components.

The discussion covered trade-offs between outsourcing and insourcing tax functions. Outsourcing provides access to specialized expertise and depth of knowledge that might be challenging to maintain in-house.

One panelist mentioned working with several service providers for tax return preparation and compliance to access a breadth of expertise. Outsourcing can also meet stakeholder requirements, like limited partners that require independent tax reporting. It also allows funds to charge these expenses to their limited partners rather than absorb the costs of an expanded in-house tax department.

Building internal capacity for tax functions provides more control over the process but with higher fixed costs. For example, it requires ongoing investment in training and resources to keep up with tax law changes.

The panelists recommended scenario planning and financial modeling to prepare for future tax changes. One speaker notes, “It’s all about that modeling and that understanding and knowing that my cash flow may not match my deductions and so forth and so on.”

Another piece of advice is to communicate potential impacts to stakeholders as proactively as possible. As one participant states, “A lot of what we do as service professionals and CFOs and CMOs are set expectations. Right? A lot of this job is about understanding what’s going to happen.”

Changing tax regulations are the reality for real estate firms. Leveraging the full range of opportunities here can greatly impact investor returns. The complexity isn’t going away anytime soon, so staying updated and working with knowledgeable advisors remains the best path forward.

Author: Danielle VanHest, Content Marketing Manager, Agora

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