3 Ways Real Estate Developers Can Save On Taxes

With taxes coming up right around the corner, I thought it might be a good idea to go over a few things to help you on your tax returns. Here are a few guidelines to follow for saving on taxes:

 1. Go Green

Ensuring the property/house is environmentally friendly and energy efficient is one of the best ways to attract special deductions in the form of tax credits. The house/home doesn’t necessarily have to be 100% energy efficient (though it's recommended) to attract some of these incentives. For instance, installing energy-efficient HVAC systems, lighting, hot water system (solar systems) and a building envelop should help lower your taxes significantly. You however should/must ensure the total energy savings from installing energy efficient systems is at least at 50% annually.

In practical terms, if a company includes energy efficient HVAC, interior lighting, and hot water systems in a 60,000sq foot building, it can then transfer energy cost savings into savings. If the energy improvements are $55,000, then the company can file tax returns lesser of the improvement costs, or at a rate of $1.80 per square feet in its 2009 tax returns.

 

2. Take Advantage of Property Depreciation

Having commercial properties with 39-year tax life or 5-year tax life inspected/re-valued can result in long-term tax savings. This mainly comes to play if your company has undertaken new projects involving expansions, new constructions, or property renovations. Cost-segregation evaluation helps categorize assets in their most tax-advantaged and appropriate depreciable lives. The structural component of the building/property, however, must be re-revalued to determine this.

Qualifying buildings (long-lived property as of 2009) also enjoy an extended bonus depreciation this is according to the American Recovery and Reinvestment Tax Act 2009. Such includes qualified leasehold improvements and new assets aged 20 years and below. Your company can also elect out bonus depreciation as well. This move can be beneficial if the company has expiring net operating losses. Real estate developers and corporate taxpayers can choose to forego the depreciation bonus in exchange for the allowance and acceleration of alternative minimum tax credits, unused credits, as well as research and development credits.

 

3. Charitable Land Contributions

Charitable motives and contributions can also help your company save some money on taxes. This however only works if your company has or is planning to donate land to a state, city, or county. You may have to check with the Internal Revenue Service to see if your motives/actions attract tax relief. For instance, the IRS can limit or disallow a tax deduction if it can prove your company benefited from the charitable contribution.

Should your company contribute land to the county to receive favors such as a zoning permit to build an establishment, then the IRS will see this as a transaction beneficial to you. For this reason, the charitable contribution needs to have depreciated over the asset life and perpetually capitalized to land.

A good example where a charitable land contribution can work in your favor is if the company contributed land for a state-maintained facility or service, e.g., a road. If the company doesn’t benefit directly from the road, you can then argue it out, thus have the contribution allowed. This mostly works best for land contributed exclusively for public use.