ACQUISITION OF REAL PROPERTY

ACQUISITION OF REAL PROPERTY

Tax planning is a key consideration in an analysis of the potential returns and risks of a real estate project.
Investors usually seek to:

1. shelter income from taxes; or

2. generate losses to shelter other earned income; or

3. obtain favorable capital gains treatment at disposition.

4. deferral of tax liability.

The manner in which an investor acquires real property can contribute to one or more of these goals.

Recent tax reforms have tended to eliminate most acquisition tax write-offs (e.g., prepaid interest) and there are
probably few immediate tax effects resulting from the mere acquisition of property. However, the method of
acquisition usually has important tax consequences at sale or other disposition of the property.

Title might be taken through a corporation or individually as community property, joint tenancy or tenancy in
common. Corporate ownership permits dealers to segregate their investment property from their stock in trade
and establish the true nature of each type of property. On the other hand, individual ownership allows greater
maneuverability if future plans are uncertain because the property can later be transferred to a corporation tax-
free.

If the taxpayer is in a relatively low tax bracket, individual taxes, particularly for a married person, will be less
than corporate taxes on a given amount of income. Although joint tenancy ownership will simplify processing
on death and reduce probate costs, the transfer of joint tenancy property cannot be controlled by will and the
half not included in the decedent’s gross estate does not receive a step-up in basis.

Adjusted Tax Basis

One of the most important factors in determining the amount of ultimate gain or loss on a transaction is the
“adjusted tax basis” of property, based on its original acquisition price. Property purchased has a basis equal to
the purchase price paid, adjusted for various items over the life of the property (e.g., depreciation). Property
received as a gift has a basis of the donor’s cost (or market value at date of gift if this is lower and taxpayer
desires to claim a loss). The beginning basis of property acquired from a decedent is generally the fair market
value at the date of death.

Tax Planning

The subject of income taxation in connection with real estate sales frequently arises in the context of ex-post
reporting of the facts. In most instances, once a tax related choice is made, it cannot be altered at the time of
filing a tax return. It is then too late to think about tax planning.

The price of a property may be less important than the financial or tax position of the buyer or seller for
purposes of developing acquisition and/or disposition strategies. Tax planning should start in the pre-
acquisition stage. Real estate has historically enjoyed a favorable position in both federal and state income tax
laws, but receipt of the available benefits requires tax awareness during the events leading up to acquisition and
continuing through the entire period of ownership.

Broker’s role. There are many subtleties in the tax laws relating to real estate income. Unless a real estate
broker is also an income tax investment counselor, the broker should never offer tax advice but should urge
clients to consult a real estate tax attorney, certified public accountant or other qualified person.