Miki Okumura Michael O’Malley Goodsill Anderson Quinn & Stifel Honolulu, Hawaii March 21, 2014 Structuring Issues • Choice of entity • • • • • LLC, limited partnership, S corporation Tax basis for debt Tax allocations Passive activity loss rules At risk rules 2 Structuring Issues • Stock vs. asset sale Sellers want stock sale Buyers want asset sale IRC Section 338 election • • • • Stock sale treated like asset sale 3 Structuring Issues • Capital gains tax treatment • • • • Developer status – ordinary income Inventory – ordinary income Depreciation recapture – ordinary income Recent developments • • 3.8% net investment income (NII) tax IRC Section 752 proposed regulations 4 Closing Conditions and Deliverables • Purchase price allocation • • • Parties essentially have to agree IRS Form 8594 Tax allocations • • • GET – taxable items Conveyance tax – transfer of multiple properties Real property tax – allocating liability 5 Closing Conditions and Deliverables • Closing deliverables • Tax clearance certificate • Bulk sales report (Form G-8A) • FIRPTA/HARPTA withholding – who is the “transferor” if there is a disregarded LLC? 6 1031 Exchanges – Current Issues • LandAmerica – QI bankruptcy case • Same taxpayer requirement • • • Co-tenancy arrangements Safe harbor for residential property • • PLR 200732012 Rev. Proc. 2008-16 NII tax – 1031 deferral applies 7 Tax Credits • Recent developments • • • Historic Boardwalk Hall (3d Cir. 2012) – federal tax credits disallowed to investor who was deemed not to be a bona fide partner Rev. Proc. 2014-12 safe harbor New markets tax credits (NMTCs) 8 Lease Transactions • • • Lease premiums Long-term lease (30 yrs.+) = fee Tax “owner” • • • Depreciation Operating deductions Uneven rents -- IRC Section 467 (below) 9 Foreclosure/Deed in Lieu Transactions • Cancellation of debt income (CODI) IRC Section 108 Exceptions • • • • • • • “Qualified real property indebtedness” Insolvency Recourse vs. nonrecourse debt Debt modifications 1031 exchange out of foreclosure? 10 Section 467 Rental Agreements • • • • Rental agreement for tangible property (a) At least one payment for use payable after year of use; or (b) stepped rents (increasing or decreasing rents) Constant rent accrual rules determine rent for both landlord and tenant Safe harbors and exceptions 11 Passive Activity Loss (PAL) Rules • • • • IRC Section 469: PALs deductible only against passive activity income/gains Material participation rules Real property rental activities are per se passive PALs accrue and carry over until passive income is earned or activity is disposed of 12 State Tax – Recent Audit Issues • • • Hotel properties – GET and TAT issues Timeshare properties – GET and TAT issues Owner builder – GET issues 13 Real Property Tax – Recent Developments • Tax rates based on actual use • • • Kauai County – effective 2013-2014 C&C Honolulu – residential rate for dedicated residential use in non-residential zoned property ($3.50/$1,000 residential rate versus $12.40/$1,000 commercial rate) Exemptions – review of exemption claims, limit on charitable purposes exemption 14 • Miki Okumura mokumura@goodsill.com 808-547-5758 • Michael J. O’Malley momalley@goodsill.com 808-547-5836 15