Reflections on HABU: Tax Strategies Can Assist Real Estate Clients Dealing with Market Ups and Downs 

Real estate clients may not be fully aware of the numerous strategies available to minimize taxes or boost cash flow, and the same may be true of the CPA firms serving them. To fill gaps in their own expertise – and to position their firm as a trusted provider of advisory services – CPAs can call on Engineered Advisory to help.

Engineered Advisory vetted about two dozen specialists and invited them to meet CPA firm leaders attending the first Highest and Best Use (HABU) conference in Plano, Texas, in August. The specialists made 25-minute presentations on their services and answered more detailed questions during extended networking breaks in the luxe Renaissance Dallas at Plano Legacy West Hotel. The goal ­– to connect CPAs with potential partners to better serve clients. 

One set of clients that could use more assistance than ever are real estate investors, who are trying to make sense of a volatile housing market while looking ahead to the future. While 2022 started strong, enthusiasm fizzled by October, with interest rates soaring and housing prices growing out of reach for many buyers. Growth in commercial real estate, too, has been hampered by the rising cost to borrow money; longer-term strategies are favored when the market is uncertain.

Some of the ideas presented over HABU’s three days included savings through solar incentives, 1031 exchanges, cost segregation and more. 

Dave Ronen, president of IL-Solar Inc., urged CPA leaders to inform their clients of the numerous tax incentives available by installing solar panels at their businesses and commercial investment properties. 

He offered the example of Litchfield, Ill.-based Worksaver, which manufactures implements for John Deere. The company took advantage of extensive Illinois solar-conversion incentives, and made a successful changeover from electricity. Worksaver states that it “builds with sunshine” from the energy generated from its 411-kilowatt solar panel array.

Solar incentives are timely. Home energy costs are at record highs thanks to ever-increasing global prices for crude oil and natural gas. The U.S. Energy Information Administration’s heating oil price benchmark reached $5.33 per gallon in mid-October, up nearly 200% since January, and up a whopping 380% compared to a year ago. Meanwhile, the residential natural gas U.S. price average, as of July data, was more than double for the year. Electricity rates are up about 7.5% this year compared to 2021.

All the while, Ronen said, oil and gas companies are raking in huge profits.

Michael D’Onofrio, Managing Director at Engineered Tax Services, discussed how a new, niche proactive valuation strategy can immediately reduce property taxes and transfer taxes at closing for CPA firm clients who are buying commercial property of at least $10 million. 

The strategy is called an Engineered Valuation Study, and it uniquely combines a real estate appraisal and business valuation principles. The end result is a detailed analysis of the financial value of components of the commercial property. Intangible assets, which are not taxable, include intellectual property, tenant relationships, leases, branding and management contracts in place, assembled workforce, licenses, unamortized tenant improvements, leasing commissions and more. 

While the analysis sounds like a cost segregation study, they differ in important ways but can work with amazing success together. Important note – the Engineered Valuation Study must be conducted before the closing while the cost segregation to maximize depreciation write-offs is done afterward.

D’Onofrio also shared multiple client success stories including the owner of a $28-million Texas apartment building who, using the techniques described above, saved more than $150,000 in property taxes annually since 20% of the purchase price was nontaxable, plus captured about $7 million, in year 1 bonus depreciation. 

Cost segregation studies are also a powerful tool to defer taxes by writing off a portion of the building’s purchase price in the first several years by focusing on components of the building (such as lighting or HVAC systems) that lose value more quickly than the entire building. 

ETS executive vice president Heidi Henderson reminded CPA firm leaders that some of their real estate clients may have no idea how the strategy can be used to help them meet their long-term goals. “This is an amazing tool to be able to plug-and-play for your clients.” Engineered Tax Services has completed over 30,000 cost segregation studies in the past 20 years and has saved clients millions of dollars in taxes.

Brenton Atcheson and Chris Davis, of Everest Infrastructure Partners, spoke about the possibilities of leasing rooftop space to wireless carriers – at up to $3,000 per month in some cases. 

According to CNBC, in addition to the 300,000 or so cell sites across the United States currently, another 1 million sites will be needed to establish 5G nationwide, leaving companies like T-Mobile, Verizon and AT&T racing to improve existing towers or build new ones. 

Everest forms partnerships with commercial real estate owners to market their properties and manage the leases. Atcheson and Davis pointed out that operating expenses are zero; owners just need to provide rooftop access. The rental money can fund renovations or other improvements. 

In a panel discussion on deferring capital gains through 1031 exchanges, the speakers gave CPA firm leaders a look at how they can help their high-net-worth clients sell appreciated investment properties, replace them with new investments from the proceeds of the sale, and avoid taxes until that property is sold.

Engineered Advisory brought in executives from brokerage firms RCX Capital Group and B+E to discuss various scenarios and the types of eligible investments.

B+E CEO Camille Renshaw said that an ideal client, for example, would be a 70-year-old owner of a $75 million apartment complex who wants to split assets evenly among his children. To replace the $75 million, the B+E platform can source properties, such as every Burger King or car wash in the nation, to see prices, comparables, etc.

RCX Capital Group MP Jean-Louis Guinchard, meanwhile, noted that CPA firms offer plenty of advice on lots of different issues, but 1031 exchanges are very specific. His firm is not looking to duplicate what CPAs do, he said, but to partner with them to better assist clients, who may have other needs beyond 1031 exchanges. “Just entering the discussion leads to so many other conversations,” he says.

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