Tax Issues for Real Estate Lawyers Presented to HSBA Real Property Section

1. Tax Issues for Real Estate LawyersPresented to HSBA Real Property Section Miki Okumura Michael O’Malley Goodsill Anderson Quinn & Stifel Honolulu, Hawaii March 21, 2014

2. Purchase and Sale Transactions • Structuring Issues • Choice of entity • LLC, limited partnership, S corporation • Tax basis for debt • Tax allocations • Passive activity loss rules • At risk rules

3. Purchase and Sale Transactions • Structuring Issues • Stock vs. asset sale • Sellers want stock sale • Buyers want asset sale • IRC Section 338 election • Stock sale treated like asset sale

4. Purchase and Sale Transactions • 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

5. Purchase and Sale Transactions • 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

6. Purchase and Sale Transactions • 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?

7. Tax-Driven Real Estate Transactions • 1031 Exchanges – Current Issues • LandAmerica – QI bankruptcy case • Same taxpayer requirement • PLR 200732012 • Co-tenancy arrangements • Safe harbor for residential property • Rev. Proc. 2008-16 • NII tax – 1031 deferral applies

8. Tax-Driven Real Estate Transactions • 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)

9. Other Real Estate Tax Issues • Lease Transactions • Lease premiums • Long-term lease (30 yrs.+) = fee • Tax “owner” • Depreciation • Operating deductions • Uneven rents -- IRC Section 467 (below)

10. Other Real Estate Tax Issues • 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?

11. Other Real Estate Tax Issues • 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

12. Other Real Estate Tax Issues • 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

13. State and Local Tax Update • State Tax – Recent Audit Issues • Hotel properties – GET and TAT issues • Timeshare properties – GET and TAT issues • Owner builder – GET issues

14. State and Local Tax Update • 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

15. Questions? • Miki Okumura • mokumura@goodsill.com • 808-547-5758 • Michael J. O’Malley • momalley@goodsill.com • 808-547-5836