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REPE 01 14 Taxes Slides

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12 views10 pages

REPE 01 14 Taxes Slides

Uploaded by

gksdndrjf123
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Why Ignore Real Estate Taxes?

• Most real estate development and acquisition


models ignore taxes completely

• Why? How can that possibly be justified?

• Reason #1: Many ways to buy / sell real estate


tax-free (REITs, tax-exempt pension funds)

• Reason #2: Ways to defer taxes, such as with


1031 Like-Kind Exchanges, as well
Why Ignore Real Estate Taxes?
• Reason #3: Often, “pass-through” entities own
real estate, so taxes depend on individual
shareholders’ tax rates

• Reason #4: Income Taxes often make a marginal


difference, though Capital Gains (and related)
Taxes matter far more

• Reason #5: Everything looks better without taxes!


Taxes: The Truth
• BUT… in many situations, you will have to think
about taxes

• Key Points: Income Taxes, Capital Gains Taxes,


and Depreciation Recapture Taxes

• This Lesson: Overview and introduction to taxes


(I am not a tax accountant or attorney – seek a
qualified professional if you need one!)
Taxes: The Truth
• Lots of region-specific points (such as the 1031
Like-Kind Exchange offered in the US)

• Capitalized vs. Expensed Items: Also varies by


region, as do depreciation policies (Land?)

• Here: Going to cover the main points for US-based


properties; concepts mostly apply in other countries,
even if the numbers differ
Real Estate Income Taxes
• Big Idea: Taxable Income is not the same as NOI
or Adjusted NOI or any other cash flow metric

• Government: “You can’t deduct all CapEx in Year 1!


It will be useful for many years, so spread it out.”

• Depreciated or Amortized: Building Purchase,


CapEx, Tenant Improvements, and Loan Fees
Real Estate Income Taxes
• Debt: Can’t deduct both interest and principal
repayments; only interest reduces taxes

• Taxable Income: NOI – Leasing Commissions –


Interest Expense – D&A of Building, CapEx, TIs,
and Loan Fees

• Taxable Income: Often $0 or negative because


of Depreciation + Interest… so what’s the point of
income taxes, again?
Real Estate Income Taxes
• Lots of Work: Additional schedules, D&A waterfalls
for assets… and with debt, taxes often make a tiny
difference

• Plus: Can look at both Leveraged and Unleveraged


After-Tax Cash Flows now – even more fun!

• This is why we ignored taxes in the case study,


and why many property models do the same
Real Estate Capital Gains Taxes
• More significant and also easier to calculate

• Idea: If you buy a property for $100 and sell it for


$150, pay taxes on that $50 gain… sort of

• Tricky: But Taxes are based on the Book Value


of the property when you sell it (after Accumulated
Depreciation and other items)

• End Result: Neutral or lower returns


Real Estate Capital Gains Taxes
• Timing: Sell a property early on, and you may
actually record a capital loss

• Accumulated Depreciation: Also taxed! (US only?)

• Idea: “We let you deduct that Depreciation the first


time around, which helped you make the property
more valuable… so now we’d like some of those
taxes you owed us, please”
Real Estate Taxes
• Now you see why so many entities and structures
exist to eliminate or reduce taxes

• Biggest Issues: Capital Gains and Depreciation


Recapture Taxes

• Reduce or Eliminate: REIT or tax-exempt pension


fund, a 1031 Like-Kind Exchange, or even a
refinancing exit rather than a sale

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