lev-os Analyzing Real Estate Tax Planning
When To Use
- Evaluating whether a property disposition qualifies for a Section 1031 like-kind exchange
- Assessing Qualified Opportunity Zone (QOZ) investments for capital gains deferral and exclusion
- Reviewing a cost segregation study to accelerate depreciation deductions
- Comparing hold-vs-sell-vs-exchange scenarios across multiple properties
- Analyzing cross-border real estate structures with international tax implications (treaty benefits, FIRPTA withholding, branch profits tax)
- Structuring acquisition or disposition to optimize basis allocation, depreciation schedules, and entity-level tax treatment
Inputs To Gather
- Property details: Type (commercial, residential, mixed-use), location, acquisition date, purchase price, current fair market value, outstanding debt
- Ownership structure: Entity type (LLC, LP, S-corp, REIT, DST), number of owners, allocation provisions
- Transaction specifics: Proposed sale price, timeline, identified replacement properties (for 1031), capital gains amount and character (short-term vs. long-term)
- Cost segregation data: Engineering study report, asset classifications (5-year, 7-year, 15-year, 27.5/39-year), bonus depreciation elections already taken
- Tax position: Owner's marginal tax rate, net investment income tax (NIIT) exposure, passive activity loss carryforwards, prior Section 1231 gains/losses
- QOZ specifics (if applicable): Census tract designation, date of original capital gain, investment vehicle structure, substantial improvement plans
- International elements (if applicable): Foreign investor residency, treaty country, FIRPTA withholding status, branch vs. subsidiary structure
Workflow
Define scope — Confirm which strategies are under evaluation (1031, QOZ, cost segregation, entity restructuring, or combination). Identify the taxable event and relevant tax years.
Validate 1031 exchange eligibility (if applicable)
- Confirm both relinquished and replacement properties are held for investment or productive use in a trade or business [VERIFY: state conformity with federal 1031 rules]
- Check 45-day identification and 180-day closing deadlines
- Evaluate boot received (cash, debt relief, non-like-kind property) and resulting gain recognition
- Assess related-party restrictions under IRC §1031(f)
- For reverse exchanges, confirm compliance with Rev. Proc. 2000-37 parking arrangements
Evaluate QOZ investment (if applicable)
- Verify the investment is in a designated Qualified Opportunity Zone [VERIFY: current census tract designation status]
- Confirm capital gain was invested within 180 days of recognition event
- Assess whether the Qualified Opportunity Fund (QOF) meets the 90% asset test
- Evaluate substantial improvement requirements for existing buildings (doubling basis within 30 months)
- Model deferral benefit (original gain deferred until 2026 or earlier disposition) and exclusion of post-investment appreciation after 10-year hold [VERIFY: current legislative status of QOZ incentives post-2026]
Analyze cost segregation (if applicable)
- Review engineering study methodology (detailed engineering approach vs. residual estimation)
- Validate asset reclassifications from 27.5/39-year to 5, 7, or 15-year recovery periods
- Calculate present value of accelerated depreciation benefit at owner's marginal rate
- Assess bonus depreciation applicability under IRC §168(k) [VERIFY: current bonus depreciation phase-down percentage for placed-in-service year]
- Flag depreciation recapture exposure (§1245 ordinary income vs. §1250 unrecaptured gain at 25%) upon future disposition
Model tax outcomes — Build side-by-side comparison of scenarios:
- Outright sale (federal + state capital gains, NIIT, depreciation recapture)
- 1031 exchange (deferred gain, adjusted basis in replacement property)
- QOZ investment (deferral value, exclusion value at 10-year mark)
- Cost segregation impact on annual cash flow and effective tax rate
- Combined strategies (e.g., cost segregation on replacement property post-1031)
Address international considerations (if applicable)
- FIRPTA withholding obligations (15% of gross proceeds for foreign sellers) [VERIFY: current withholding rate and exemptions]
- Treaty-based rate reductions or exemptions
- Branch profits tax for foreign corporations
- State-level withholding for nonresident sellers
Synthesize findings — Summarize the optimal strategy, quantify tax savings, and flag implementation risks, deadlines, and compliance requirements.
Output
- Executive summary: Recommended strategy with estimated tax savings and key trade-offs
- Scenario comparison table: Side-by-side tax impact for each strategy analyzed (sale, exchange, QOZ, cost segregation)
- Timeline and deadlines: Critical dates (45-day ID period, 180-day closing, QOZ investment window, placed-in-service dates)
- Risk factors: Disqualification triggers, audit exposure areas, legislative uncertainty
- Implementation checklist: Qualified intermediary engagement, QOF formation steps, cost segregation study commissioning, entity restructuring actions
- [VERIFY] items: Consolidated list of jurisdiction-specific or time-sensitive points requiring confirmation
Quality Checks
- All IRC section references are cited correctly and correspond to current law
- Tax rate assumptions match the owner's actual marginal bracket, not default rates
- 1031 timeline calculations account for weekends/holidays per Treasury Regulation rules
- Cost segregation benefit is calculated on a present-value basis, not nominal
- QOZ analysis reflects current legislative status (not outdated pre-extension assumptions)
- State tax conformity is flagged for every federal provision relied upon [VERIFY: state-by-state conformity for 1031, QOZ, bonus depreciation]
- Depreciation recapture is modeled in every disposition scenario, not just outright sale
- Net investment income tax (3.8%) is included where applicable
- All [VERIFY] markers are present for jurisdiction-dependent or time-sensitive items