Crunching the Numbers: Anchin’s Robert Gilman Tackles Hot Topics in Real Estate Tax
Al Barbarino Nov. 12, 2013, 9 a.m.
The economy is improving, values are rising, transactions are increasing, banks are lending, Downtown is booming, and it’s all very apparent to Robert Gilman, a partner at Anchin, Block & Anchin LLP who co-chairs the accounting firm’s real estate practice. “People say we’re in a stalled economy,” Mr. Gilman said. “But in real estate, we’re in a good economy.” While January, February and March is the usual grind, Mr. Gilman’s tax season is also “predicated on how many real estate deals I have going on,” and, at the moment, transactional volume is as good as it has been in five or six years, he said. “These buildings are changing hands, not because people are desperate to get rid of them but because they’re adding value to the building and they are making them more profitable,” he said. Mr. Gilman, whose practice assists developers, families, funds and syndicates seeking guidance on deals, financing, estate planning and more, sat with The Commercial Observer last week to discuss some of the major tax and accounting issues currently gripping the city’s real estate market—and how to navigate them as smoothly as possible—as a new mayor prepares to take office.
Foreign money is what’s helping a lot of the economy and these real estate deals, because if you’re going out and raising $100 million and you can get $60 million or $70 million of that in foreign money, you have no problem taking that money. For the residential market, a lot of these foreign investors were coming in and raising the prices of condos. You’d see $60 million one day, and the next day it was $80 million. Those are foreign investors.
Our clients that own real estate are looking for that foreign money to come in and buy a lot of their buildings, because [foreign investors] are paying very high prices. In terms of the investment side—funds or runoff syndication deals—they’re looking for a lot of foreign and high-net-worth money. Banks are getting better at lending in terms of the loan-to-value they will lend upon, but it’s still not where it was in the mid-2000s.
How does FIRPTA play into this?
On the FIRPTA side, there are certain requirements. If there are distributions going out to a foreign investor, there are certain withholding requirements. What’s really important is the compliance in this area. So if someone wants to give a distribution and they forget or they don’t withhold, say, a 30 percent withholding, [the IRS] comes after the company for that.
Do you deal directly with foreign entities?
We have a lot of relationships where a foreign investment company or individual will come to us and say they want to invest in real estate in the U.S. There are a lot of different rules, because now it’s a foreign-owned investment. Sometimes, they have to file U.S. tax returns; sometimes, they don’t, and we help them structure it the right way. Just like a U.S. taxpayer, tax savings do make a difference to them.
I will tell you, though, that, with a lot of foreign money, they’re not as concerned about paying taxes; they just want their money outside of whatever country they’re in, and they feel that it’s safer to have it in the U.S. But at the end of the day, if you’re going to sell something, the more that you can keep in your pocket, the better off you’re going to be.
Your firm did a study showing that less than 20 percent of small- to mid-size businesses took advantage of any kind of tax credits from Hurricane Sandy. How did this—and the storm in general—impact real estate-owning clients?
We did have some clients with buildings that had significant damage. It’s more about making sure they took care of insurance and to make sure they applied for FEMA. A majority of them we helped apply for benefits. A lot of these new incentives are geared toward the tenants of the real estate owners, so we’ve been successful in letting [owners] know what credits are out there, so when they’re going out to get a new tenants, it’s something else to bring to the table.
So-called repair regulations are set to go into effect with the New Year. What can real estate owners expect?
You may have to go back and amend certain returns, so we’re training our clients as to where the differences are. Something that you used to capitalize you can now expense; something that you expensed we’re going to have to capitalize now. We’re being very proactive in going back and taking a look at things that were done in the past, what changes need to be made and if in fact we do have to amend certain returns. In a lot of cases, it’s a benefit to clients. In others, unfortunately, they have to pay a little more in taxes.
You assist clients with estate planning. What do you recommend for aging owners looking to maximize their estates?
Real estate has always been a great asset where, if you own real estate or a less than majority interest in a piece of real estate, you can take discounts. So if someone was to give someone $1 million in cash, well, it’s worth $1 million in cash. [But] if someone were to give away a $4 million building and, say, we’re giving you 25 percent, you can take advantage of discounts. So maybe that $1 million is really only valued at $750,000, so there’s a lot of creative ways to transfer more wealth than if it were just regular cash. There are also beneficial gifting limits in the estate rules that a lot of our clients are still taking advantage of.
An elderly man or woman has a $10 million property and thinks he might die in the next year. He has several kids. What’s the best option?
The benefit of giving it away now, especially if you own 100 percent of the building, and you were to give it away to 10 grandkids is that each of them are getting less than majority interest, so there are advantages to take away from discounts. [But] if the individual were to die, even if he was giving it to 10 individuals, you have to value it as if they had a majority interest, so you lose out on those discounts.
So there could be advantages to giving it away before death. There could also potentially be some disadvantages, depending on where their basis is. So if they had taken a lot of money out of the property, there are certain circumstances where it’s beneficial to have it in their estate when they die.
How will the Obamacare 3.8 Medicare tax increase (on all passive income, like interest dividends and real estate investments, if you make more than a certain amount) impact real estate professionals?
A lot of times a real estate owner puts money into real estate deals they aren’t operating, so it’s deemed to be a passive investment. So normally if you had earned, say, $100,000 from a real estate deal that you were deemed to be passive in, you would be subject to the 3.8 percent tax.
If you’re a real estate professional or owner, even if you had an investment that was deemed to be passive, there are ways to treat that as being nonpassive (or active), because you’re a real estate professional and you are not subject to the tax. We are monitoring a lot of our clients to make sure that they qualify as a real estate professional.
Bill De Blasio will be the next mayor. How could that affect taxes?
In dealing with many different elections and speaking with clients, there are always campaign promises that don’t come to fruition. Most people think with this new mayor the rates for the wealthy are going to increase. But the rates for city residents were going up anyway. I think that’s going to continue. But again, we’ll see.
How is the rebirth of Downtown impacting your business?
We have a lot of clients involved in some major projects downtown, and we’re seeing some positive activity. There are a lot of incentives for moving downtown, and we are making sure that our clients and their tenants are aware of that. These larger projects downtown, building a building and starting out with no tenants—your business will only be as good as how many tenants [you have]. We have seen a lot of activity with some of these buildings that are going to be completed in 2014, ’15, ’16, where they are getting tenants now because [the tenants] want to get in on the early side of these incentives.
How do you feel about the often-decried tax structure for real estate in New York?
The rates are definitely higher in New York than some of my clients that may own buildings in the South, so when you see the amount they are paying in real estate taxes, you’re like, “This is crazy.” But the income is greater here.
The revenue is here, and as the economy comes back, New York City is always the place businesses like to come to. So while the real estate taxes are higher, if the revenue bases keep increasing, our clients are going to be making more money.
There are organizations that are on top of this, like [the Real Estate Board of New York], making sure that it’s still a viable place to own real estate. Real estate is not like an operating business. With certain businesses, it doesn’t matter where you are. A manufacturer can manufacture in New York, New Jersey or Florida—it doesn’t make a difference. If you’re a real estate owner and you own in New York, it’s not like you can move it to New Jersey.