2023 Marcum Year-End Tax Guide

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depreciation expense). Taxpayers potentially subject to the interest expense limitation in 2023 should consult with their tax advisors to study the cost-benefit of electing RPTOB status. PHASE OUT ON BONUS DEPRECIATION FOR CERTAIN PROPERTY In tax years 2022 and prior, the TCJA allowed for 100% bonus depreciation for property owners with assets with a recovery period of 20 years or less. This included heavy machinery, manufacturing equipment, vehicles, and furniture. Also, improvements to real property labeled “qualified improvement property” were included, resulting in a sizeable upfront deduction for these capital expenditures. In 2023 and going forward, the deduction decreases. For tax year 2023, this allowable deduction is 80%. In 2024, it will drop further to 60% and continue from there. Taxpayers will benefit from cost segregation more than ever, which allows them to properly assign assets to their class life. This allows for higher deductions when assets are designated to lower-class lives based on their appropriate qualification because additional assets qualify for bonus depreciation. EXCESS BUSINESS LOSS RULES Noncorporate taxpayers cannot deduct excess business losses for post-pandemic tax years ending December 31, 2020, and before January 1, 2029. They must treat

them as net operating losses (NOLs) that carry over to future years. Taxpayers need to pay attention to this limitation when reviewing their overall tax plan. For tax year 2023, excess business losses are limited to $578,000 for joint tax returns ($289,000 for single). Any unused losses can be carried forward, but this limitation does deal a significant blow to many taxpayers who enjoyed increased losses during the pandemic years. INTEREST RATE ENVIRONMENT Over the past few years, interest rates have soared. The days of enjoying 2% to 3% interest rates have passed for now, and real estate owners must be agile in the marketplace. It is crucial to evaluate the tax situation for each deal in addition to all other factors, as returns on investment have become a different calculation for each taxpayer. The loan-to-value (“LTV”) ratio, or mortgage compared to appraised value, is incredibly important to pay attention to in each deal and ongoing deals. With higher interest rates, real estate appraised values have decreased; therefore, the LTV has declined on properties. This impacts the overall value of the property and the feasibility of any given deal. Real estate owners and operators should be aware of exit strategies: cancellation of debt, a “deed in lieu” transaction, or taking advantage of the insolvency exclusion. An insolvency exclusion is enacted when a discharged debt is excluded from gross income if the

discharge occurs when the taxpayer is insolvent. Insolvency is defined as an excess of the taxpayer’s liabilities over assets. QUALIFIED OPPORTUNITY FUNDS Taxpayers that have invested in Qualified Opportunity Funds (“QOFs”) need to consider the rules impacting deferred gains on the transactions carefully. These unique investments allow taxpayers to defer gains through December 31, 2026, with taxes generally paid in April 2027 for those with extensions. The holding period on these investments is anywhere between 7 and 10 years for those invested in QOFs, and the overall economic environment has shifted since they were first introduced. Real estate owners or investors may consider refinancing QOF construction loans and finding fixed debt options as interest rates continue to rise. This can help predict returns and keep stable cash flows throughout the investment and when investors exit. This year presents many challenges and unique changes for taxpayers in the real estate industry. Challenges and disruptions to an existing real estate venture may prove to be an opportunity for existing or potentially new investors if navigated strategically. These considerations should be carefully analyzed to determine the best planning strategy for each taxpayer’s situation.

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