October 01, 2014
Article Co-Authored by Russell Lightman, Tax & Business Services Partner, "Saving Taxes and Enhancing the Value of Real Property" Featured in Real Estate Taxation
Saving taxes tends to drive most discussions between advisors and clients, but enhancing asset performance and principal protection are also worthy of consideration. By maximizing asset-class entities' and equities' performance as well as reviewing the applicability of making Section 1031 elections and using cost segregation, advice in these areas help clients achieve additional economic benefits they might not have considered on their own.
The Challenger of Wealth
Wealthy families often own large amounts of real estate that may be held by the client, the clients' children, and trusts for family members. These assets are often held for many years, sometimes for generations. Complicating matters is that most real estate ventures are usually owned in multi-tier controlled entities, often formed as limited liability companies (EEGs) or limited partnerships (LPs). Also, the real estate may be subject to thirdor related-party liens.
There are a variety of techniques for saving taxes and increasing cash flow/yield associated with real property assets, but taking advantage of them must occur after a thorough review of current laws and each individual situation. Options are available for assets that are highly appreciated and those that have had disappointing results, but there is no "one size fits all" solution.
The merits of placing real property assets into LLCs or LPs as well as trusts for asset protection have been well documented. What advisors and clients must be aware of is that there must be a legitimate business purpose for any equity transfer; tax avoidance cannot be the primary reason.'
Preventing fractionalization of the real estate over years and providing for successor management are common arguments for establishing partnerships, as is protecting the assets from creditors or litigants who might seek to seize property if the assets were directly held. Other reasons could include market and economic risks for given asset classes and lack of diversification.