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The volume of new deals is simulating the commercial and industrial real estate markets. An abundance of capital sources combined with improved fundamentals within the leasing markets has caused property values to improve. The current market dynamics provide unique opportunities to implement tax minimization strategies. Certain opportunities require specific timing considerations to be implemented effectively.

Effective tax planning requires ongoing monitoring of current law related to all levels of taxation including the county, state and federal governments. This article outlines some practical approaches to be considered within each jurisdiction.

Property Taxes

Many real estate owners have already appealed their assessed values and received reductions as a result of the decline in the real estate markets from the hey days of the 1980s. A majority of these assessed value reductions are temporary and will be increased back to their original base- year valuation as the local markets improve. Accordingly, the assessed value reductions taxpayers have fought so hard for will be eliminated entirely as the property values recover. Good planning now can achieve permanent reductions.

A new base-year value is established when a property experiences a change in ownership. Effectuating a change in ownership can convert an existing value decline into a permanent assessed value reduction. There are different ways to effectuate a change in ownership. The most common is when a property owner sells or purchases property in an arms length transaction. On the other hand, a transaction can be planned which would not require the property owner to give up his effective ownership interest and has little or no added economic impact. The transaction could be as simple as contributing the property to a partnership for a 99% interest, or having one partner with a 50% interest in the capital and profits of a partnership acquire one percent of another partner's interest. At any rate, by locking in a lower base-year now, you achieve substantial savings.

State Taxes

Many real estate transactions in the '90s have been associated with a financial restructuring. These restructures typically involve some form of debt cancellation. Absent a special provision to exclude this debt cancellation from income, it is otherwise reportable for income tax purposes. The Revenue and Reconciliation Act of 1993 enacted a special provision to allow property owners to reduce their depreciable basis in real property for the amount of income attributable to cancellation of Qualified Real Property Business Indebtedness. This afforded major relief to the real estate industry. One problem has been that this special provision has not been adopted by the State of California. Currently, there is a tax bill awaiting the signature of Governor Pete Wilson which would bring California into conformity with federal law. This conformity bill would allow consistent treatment at the state level for cancellations occurring on or after January 1, 1996. Taxpayers that have postponed restructures because of the state tax impact should renew their efforts in anticipation of Wilson's approval of this conformity bill.

Federal Taxes

Real estate development and acquisitions create a unique opportunity to maximize depreciation deductions. Currently, nonresidential real property is depreciable using the straight line method over 39 years. However, the associated land improvements and personal property can be depreciated over a 5 to 15 year useful life. Accordingly, depreciation deductions can be maximized through component depreciation. For new developments, componentizing improvements can be accomplished through detailed record keeping and contractor reporting requirements. Componentizing a new acquisition requires a detailed analysis of the building's design and associated reproduction cost. A little extra effort can result in substantial income tax savings.

This article has briefly touched upon some strategies which may assist to reduce or eliminate taxes currently being paid. If you feel one or more of these strategies might apply to you as a property owner, you should consult with an accountant, qualified professional or attorney to determine if in fact they do apply.