lev-os Managing Real Estate Tax Considerations
Structures real estate tax planning with 1031 exchange, depreciation, and opportunity zone analysis.
When To Use
- Planning a property disposition where a 1031 like-kind exchange may defer capital gains
- Evaluating depreciation strategies (cost segregation, bonus depreciation) for newly acquired or repositioned assets
- Assessing whether a property or fund qualifies for Qualified Opportunity Zone (QOZ) benefits
- Reviewing REIT tax compliance for dividend distribution requirements and asset/income tests
- Comparing hold-vs-sell scenarios with after-tax return modeling
- Structuring acquisitions through entity selection (LP, LLC, DST, TIC) for optimal tax treatment
Inputs To Gather
- Property details: Asset type, acquisition date, purchase price, current FMV, outstanding debt
- Ownership structure: Entity type, investor count, tax status (taxable, tax-exempt, foreign)
- Depreciation history: Placed-in-service dates, method used, accumulated depreciation, any cost segregation studies already performed
- Transaction intent: Hold period target, planned disposition method, reinvestment timeline
- 1031 exchange specifics (if applicable): Relinquished property identification, 45-day ID window start, 180-day exchange deadline, qualified intermediary status
- QOZ specifics (if applicable): Eligible capital gain source, investment date, census tract designation, fund vs. direct investment structure
- Jurisdiction: State and local tax regimes affecting the property [VERIFY]
Workflow
Profile the tax position
- Catalog each property's adjusted basis, depreciation recapture exposure (Section 1250 ordinary vs. unrecaptured Section 1250 at 25%), and embedded gain/loss
- Identify investor-level tax characteristics (ordinary income bracket, NIIT applicability, state residency)
Evaluate depreciation optimization
- Determine whether a cost segregation study would accelerate deductions by reclassifying building components to 5-, 7-, or 15-year lives
- Quantify bonus depreciation benefit under current phase-down schedule [VERIFY — bonus depreciation percentage changes annually post-TCJA]
- Flag any Section 179 elections available for qualifying real property improvements
Analyze 1031 exchange viability
- Confirm both relinquished and replacement properties qualify as like-kind (real property held for investment or business use)
- Map critical deadlines: Day 0 (close of relinquished property), Day 45 (identification deadline), Day 180 (exchange completion)
- Apply the three-property rule, 200% rule, or 95% rule for identification, selecting the most flexible option
- Calculate deferred gain, boot received (cash or debt relief), and any taxable portion
- Assess reverse exchange or improvement exchange structures if timing requires it
Assess Qualified Opportunity Zone benefits
- Verify the capital gain is eligible (realized within 180 days of investment into a QO Fund)
- Confirm the property/fund meets the 90% asset test and substantially-all requirements
- Model the three-tier benefit: deferral of original gain until 2026 (or earlier disposition), and exclusion of post-investment appreciation if held 10+ years [VERIFY — legislative updates may alter deferral/exclusion rules]
Model REIT-specific considerations (if applicable)
- Verify the 75% asset test (real estate assets) and 75%/95% income tests
- Calculate required dividend distributions (minimum 90% of REIT taxable income)
- Identify prohibited transaction risk on property sales and safe harbor compliance (seven-year hold, etc.)
Produce after-tax comparison
- Build side-by-side scenarios: outright sale vs. 1031 exchange vs. QOZ investment vs. continued hold
- Include federal capital gains, depreciation recapture, NIIT (3.8%), and state/local taxes [VERIFY — state conformity with federal provisions varies]
- Present IRR and equity multiple on an after-tax basis for each scenario
Output
- Tax position summary: Per-property table showing basis, accumulated depreciation, embedded gain, and recapture exposure
- Strategy comparison matrix: After-tax IRR, equity multiple, and net proceeds for each disposition/reinvestment scenario
- 1031 exchange timeline (if applicable): Calendar with identification and completion deadlines, intermediary requirements, and boot calculations
- Depreciation optimization memo: Estimated incremental deductions from cost segregation or bonus depreciation, with NPV of tax savings
- QOZ benefit schedule (if applicable): Deferral timeline, projected exclusion value, and compliance milestones
- Risk flags and open items: Jurisdiction-specific issues, pending legislative changes, and items marked [VERIFY]
Quality Checks
- Confirm all gain calculations reconcile: sale price − adjusted basis = total gain; recapture + capital gain = total gain
- Verify 1031 deadlines are calculated from the actual closing date, not the contract date
- Ensure depreciation recapture is split correctly between unrecaptured Section 1250 (25%) and any Section 1245 ordinary recapture
- Cross-check REIT distribution requirements against actual taxable income, not GAAP net income
- Validate that QOZ census tracts are still designated [VERIFY — designations have expiration dates]
- Mark all state-specific tax rates and conformity assumptions with [VERIFY]
- Flag any position that relies on pending legislation or IRS guidance not yet finalized