14A — July 12 - 25, 2019 — M id A tlantic
Real Estate Journal
www.marej.com
M id A tlantic R eal E state J ournal
By Bruce Johnson, Capstan Tax Strategies Compare and Contrast: 1031 Exchanges and Opportunity Zones Deck: Both options can be . . . continued from page 7A
QOZ investments cannot boast the same. Heirs are fully responsible for capital gains taxes accrued, which will be due in 2026. However, if the QOZ investment is held for a full 10 years, the basis of the QOZ is stepped-up to full market value at the time of the sale, eliminating capi- tal gain on any appreciation entirely. This is a permanent tax exemption, and the tax- payer is not required to pay any federal capital gains tax when the QOZ investment is eventually sold. Both incentives have their merits and limitations, and both may be powerful invest- ment tools when used properly. In fact, the wise investor might find utility in both opportuni- ties at different points in his career. The thoughtful investor will consult with both legal and tax professionals to select the best incentive for his current situation, and may even couple his selection with other tax strategies like cost segregation to further enhance cash flow. One thing is certain in the world of commercial real estate today: great opportunities exist, but with them come greater complexities. Bruce A. Johnson, MBA, CEM, is a co-founder and partner at Capstan Tax Strategies. the New York State Common Retirement Fund. The project was also awarded a $1 mil- lion Capital Grant through Round 6 of Governor Cuomo’s Regional Economic Council, and a $250,000 grant from National Grid Main Street Revitalization. Chase is pro- viding $3.9 million in tax credit equity. The property will uti- lize federal and State historic rehabilitation tax credits, and will benefit from a PILOT agreement with the City of Utica Industrial Development Agency. Situated on slightly more than one acre, the building was designed by well-known Utica architect Frederick H. Gouge and constructed in three sec- tions between 1881 and 1901. Originally built as a clothing factory, in 1934 it became a factory for the manufacture of spark plugs, in 1947 became home to Utica Distributing Co., and later Doyle Hardware. When in Doubt, Seek Assistance
ing, flexible reporting, and sensitivity/scenario building for structured stress testing, this comprehensive software helps organizations maximize performance and profitability. FUEL is an intuitive, fast, accurate, collaborative, open and affordable valuation plat- form. It delivers real-time transparency while automat- ing the entire valuation pro- cess from start to finish. The product, accessible from web and mobile devices, features advanced cash flow modeling tools – including build-and- share discounted cash flow models – and an attractive interface for creating charts to compare various assumptions across properties. AP Processing AvidXchange is a leading provider of accounts payable and payment automation solu- tions for midsize companies. Its purchase order, invoice and payment applications are designed to streamline and automate workflows. AvidX- change also offers electronic services with multiple options for billing and payments. Developed by Core Associ- ates specifically for Acumatica Construction Edition, Acuma- tiScan is an accounts payable workflow automation solution. With a special focus on the intricacies of construction ac- counting, AcumatiScan offers paper-free document routing, What if there is a differen- tial amount in the equity or debt of the relinquished assets and the replacement assets? If excess funds remain after a 1031 exchange, there will be a taxable gain. This isn’t an issue with a QOZ investment, as the investor is not required to reinvest all the proceeds of the assets sold. The taxpayer can tailor the exact amount reinvested to equal the exact amount of capital gains real- ized in the past 180 days, thus preventing any inequity and subsequent taxable gains. Capital Gains Tax Deferral A key attribute of the 1031 exchange is that it isn’t time- bound. Investors may (and very frequently do) roll funds from the sale of one replace- be reinvested within 180 days. Similarly, a taxpayer must reinvest his funds in a QOF within 180 days of the sale of the original assets.
customized notification set- tings and other automated features that simplify time- consuming AP tasks. Document and Approval Management DocuSign has transformed the way businesses send, sign and manage agreements and collect payments. Reliable and trusted worldwide, DocuSign enables users to complete online business transactions quickly and securely on any mobile device. It enables fully digital workflows that save money and increase efficiency. Adobe Sign is a popular tool for preparing and sending documents for signatures. Us- ers can sign, create forms and send documents via a browser, mobile device and popular applications. As Microsoft’s preferred e-signature solution, Adobe Sign can be used to ad- dress signature tasks within Outlook, Word and Power- Point. Signing is as simple as a click, tap or swipe. These are just a few of the solutions that can be used in the multi-cloud world to build the perfect construction and development technology stack. The possibilities are endless, and we are excited to be involved in the CRE Tech 3.0 revolution. Michael Mullin is presi- dent of IntegratedBusiness Systems (IBS) in Totowa, NJ. ment property right into the purchase of another replace- ment property, and so on. This cycle of exchanges (and associated tax deferrals) can happen indefinitely — and in fact is ideal. Many investors consider this when planning for the future. If an investor passes away before the invest- ment is sold, the heirs inherit the property with a step-up in basis equal to the fair market value of the property at that time. The heirs may pay no capital gains tax whatsoever. The value of this strategy has begotten the morbid but wise expression, “Defer, defer, die,” and has made the 1031 exchange attractive to the thoughtful, long-term investor for some time. QOZ investments, however, have a hard deadline. Capital gains tax can be deferred until the investment is sold, or at the latest, December 31, 2026.
Rollovers are not an option. Capital Gains Tax Reduction 1031 exchanges only defer capital gains tax, but can’t reduce them. This is where QOZ investments really excel. If a QOZ investment is held for five years, the taxpayer will enjoy a 10-percent reduction in capital gains tax liability. If the investment is held for seven years, the tax burden on the original gain invested will be reduced by another 5 per- cent, for a total of a 15-percent capital gains tax reduction. However, that aforementioned deadline of December 31, 2026 means the clock is ticking. If a taxpayer wishes to meet the seven-year mark, the QOZ investment must be made by the end of 2019. When it comes to capital gains tax reduction, the ad- vantage appears to lie with QOZ investments, but many clients won’t hold the invest- ment long enough to enjoy the full benefits. Capital Gains Tax Upon Sale It’s finally time to dispose of the selected investment. If the investor is still living at the time the final property is liquidated, all capital gains as- sociated with a 1031 exchange will be taxed. However, the aforementioned “Defer, de- fer, die” principle eliminates capital gains tax for the heirs of a taxpayer who dies before liquidating the investment. ESD president, CEO and Commissioner Howard Zem- sky said, “The Doyle Hardware Building’s transformation will continue the growth of down- town Utica and complements the strategic state investments that are revitalizing cities, at- tracting new talent and grow- ing economies around New York State.” “We’re proud to support the revitalization of The Doyle, helping to preserve a his- toric building while bringing housing and retail opportuni- ties to the Utica community,” said Tim Karp , executive dir., Community Development Banking, Chase . CPC, along with lending partner Five Star Bank , pro- vided a $12 million construc- tion loan. CPC also provided a SONYMA-insured $9.3 mil- lion permanent loan financed through their partnership with
Estimating PlanSwift’s digital esti- mating and takeoff software for the construction industry enables contractors and esti- mators to easily and efficiently performmaterial takeoffs and estimate quantities for precise and accurate bids. It features “click, drop and estimate” functionality for projects of all sizes, ensuring accurate and timely calculations, and easy adjustments as project needs change. ProEST offers 24/7 access to client relationships with rich functionality for customer resource management, cost estimating, takeoffs, integra- tions and reporting. The prod- uct has been designed for both general contractors (offering detailed cost estimates, digital takeoffs and analysis tools for subcontractor comparisons) and subcontractors (featur- ing a flexible, single solution for estimating and digital takeoffs). Budgeting and Valuation ARGUS Enterprise is a single, scalable platform that brings together ARGUS Valu- ation DCF, ARGUS Valuation Capitalisation and ARGUS Asset Management – three leading valuation and asset management solutions. Com- bining asset and portfolio valuations, budgeting and investment structure forecast- Both incentives run on very tight timeframes, and 180 days is the magic number. In the case of a 1031 exchange, the clock starts ticking at the time the relinquished property is sold. The taxpayer has 45 days to identify a replace- ment property and 180 days to close on it. Note that the 45-day identification period is a subset of the total 180 days. In short, all proceeds from the original sale of the relinquished property must — while rural QOZs may lack investors and languish. Addi- tionally, substantial improve- ment of the investment in the QOZ is required if the original use of the property didn’t com- mence with the QOF. This generally limits investments to new construction/redevelop- ment projects, another restric- tion on the potential investor. Timing is Everything
How to build the best construction and . . . continued from page 6A
continued from page 11A CPC & Empire State Development . . . large and small.
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