by Justin Gugajew, Tax Manager, Moss Adams LLP
Given the spotlight that has been cast on the national debt lately, very few believe there will not be sweeping government reform, whether through tax increases, spending cuts, or both. Even if Congress fails to reach a deal to help balance the budget, many current tax incentives would expire after 2012. In addition, absent new legislation, starting in 2013 we will see several rate increases, including:
- A jump in the highest marginal federal tax rate, from 35 percent to 39.6 percent
- A 3.8 percent surtax on net investment income to help fund health care reform legislation
- A rise in the capital gains rate, from 15 percent to 20 percent.
So clearly, as real estate professionals navigate through transactions this year and beyond, tax implications become an increasing concern. Real estate investors are commonly exposed to a spectrum of complex tax laws, and tax planning can be a vital tool to help increase cash flow.
One important strategy is taking advantage of the opportunity to accelerate the depreciation deductions of fixed assets, such as real estate. This is called cost segregation, and it allows a taxpayer to reclassify certain assets, effectively reducing their tax lives. The result? A reduction in the taxpayer’s current income taxes, freeing up more cash to invest in the business.
Another issue to monitor: Given the current political environment, carried interest legislation has also been mentioned in Congress. Under the current draft, such legislation could affect many real estate joint ventures and require real estate operators to recognize taxable income much earlier—and at a higher tax rate—than they do now.
Regardless of what changes come about in Congress, it is important to consider tax implications when entering into transactions and structuring deals. Understanding the strategies available to you can help you stay afloat during uncertain times.
For questions or comments on this article, contact the author at Justin.Gugajew@mossadams.com.