Acquisitions
Purchase Agreements: A clear understanding…
Property descriptions and terminology used in real estate purchase agreements have substantial consequences to future tax considerations.
In the US Tax Court case Peco Foods vs. Commissioner, the ruling states, “…where parties to an asset acquisition agree in writing, as to the allocation of any amount of consideration, or, as to the fair market value of any of the assets transferred, that agreement is binding upon the seller and buyer…”
And then continues, “…where parties enter into an agreement with a clear understanding of its substance and content, they cannot be heard to say later that they overlooked possible tax consequences.”
RPTI can help ensure that real estate buyers and their legal advisors truly have a “clear understanding” per the US Tax Court, and secure available tax incentives in the terms and conditions of purchase agreements.
1031 Exchange: It’s not just about Capital Gains…
Its widely known that the ownership of real property may be transferred by “exchange” under the rules of IRS Section 1031, which allows for the deferral of gains and their potential tax consequences.
It’s a much lesser-known fact that in addition to a deferral of taxes from gains, the purchaser may choose between two depreciation methods as part of the 1031 exchange, and RPTI has the needed expertise to help determine which is the right choice for a specific circumstance. The depreciation election in a 1031 exchange may include one of the following:
- Carry Over: The basis of the relinquished property (sold property) carries forward, leaving intact the original acquisition date, cost, and amount depreciated. Any additional or “buy-up” basis in the replacement property (newly purchased property) is placed into service as of the exchange date, and begins depreciation as applicable to the property type.
- Elect Out: An election to not apply 1031 carry over depreciation rules, and then begin depreciation for both the carry over basis (sold property) and buy-up basis amounts (replacement property) as of the date of the exchange.
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