Tax reform passed in 2017 created major changes and opportunities for high-net-worth taxpayers, particularly those who are real estate developers. Planning for the ultimate continuation or sale of your business is as important as growing your business. From a strategic planning perspective, real estate developers may want to consider targeted trust strategies.
As a real estate developer, you may be in a favorable income tax position because of the nature of your business and the assets you employ in that business. Assets such as depreciable buildings, depreciable construction machinery and equipment, as well as other business assets, may provide income tax deductions that effectively shelter much of your income. These income tax benefits may be realized by you as a sole proprietor of your development business or as owner of various pass-through entities, such as partnerships or limited liability companies that hold your real estate development assets.
Let’s take a look at today’s tax laws and then we’ll explore some specific strategic planning opportunities using trusts that may be of value to real estate developers.
For 2023, the estate, gift, and generation-skipping transfer (GST) tax is still historically high at $12.92 million for individuals and $25.84 million for married couples. There are still seven individual tax brackets, with a top rate of 37%. The standard deduction is currently $13,850 for individuals and $27,700 for married couples. In addition, the corporate tax rate today sits at 21% (www.irs.gov).
Many of the provisions of the current tax law affecting individuals are scheduled to sunset after December 31, 2025 (www.irs.gov), at which time the prior provisions of the tax law would return if no further legislative action is taken. However, with a new administration in the White House, change could occur well before that time.
Please see important disclosures at the end of the article.