Recently our own shareholder Ron Stumpf was invited to participate in the annual Commercial Real Estate Roundtable put together by the Orange County Business Journal. Ron was joined by some of his top colleagues in the industry in answering questions related to the current state of commercial real estate. Below are his responses.
What current industry regulations are having the greatest impact on your clients?
In order to secure financing more and more lenders are requiring the property to be held in a Single-Member LLC (SMLLC). Banks require this type of structure in order to limit liability with regard to each part of a project. For example, liability claims arising out of a parking garage held within a SMLLC are segregated from the office building that might be held by a separate SMLLC. A Single-Member LLC is a “disregarded entity” for federal tax purposes; however you still must file Form 568 in California and pay LLC fees. In order to obtain asset protection, it is common to form a limited partnership with the individual as a 99% limited partner and a 1% S Corporation as the general partner. This gives the individual property owner added asset protection.
What are the unique tax compliance issues that CRE firms are facing?
Commercial real estate owners are looking for ways to defer gains on property sales. One common strategy to defer gains is to enter into a 1031 exchange, which allows the property owner to sell their real estate and reinvest the proceeds in new property. Sound advice on this matter can mitigate most 1031 exchange issues and provide a way for property owners to take advantage of this powerful tax savings option. However, California has recently enacted legislation to close a tax loophole previously available to commercial real estate owners who exchanged a California property for a property in another state. The legislation now requires commercial real estate owners to report the exchange of California property for property in another state. This allows the FTB to track the new property until sold and requires the owners to pay California income tax on the taxable gain originally deferred.
What issues with the IRS have your commercial real estate clients recently encountered?
Clients who invest or develop commercial real estate often assume that they qualify as a “Real Estate Professional” as defined by the IRS. However, the IRS has very specific rules that must be followed in order to qualify as a “Real Estate Professional”. The key factor to obtain this status is maintaining a contemporaneous business log. IRS regulations under §1.469-5T(f)(4) prescribe the information taxpayers should record in a log including the date, description of service performed, and hours worked. The IRS will also request corroborating evidence such as calendars, appointment books or other supporting documentation. If you do not maintain a log, the IRS can disallow the “Real Estate Professional” status.
Ron Stumpf Highlighted as Commercial Real Estate Expert
It is clear why the Orange County Business Journal chose Ron Stumpf to be part of this roundtable discussion. Ron was able to share some insight and concerns for the commercial real estate industry in the wake of the recession. For more information about commercial real estate investment strategies call Ron Stumpf at 714.569.1000.
