The Section 754 Election in a Real Estate Partner Buyout
When a partner sells their interest in a real estate partnership, the incoming partner pays market value but inherits the partnership’s old, depreciated basis in the buildings. A Section 754 election fixes that mismatch by stepping up the buyer’s share of the property basis to what they actually paid. Without it, the new partner is taxed as if they received depreciation deductions they never got the benefit of, and the consequences run for as long as the partnership holds the property. This guide explains the inside-basis-versus-outside-basis mismatch the election exists to fix, why real estate partnerships feel it hardest, who benefits and who actually decides (it is the partnership’s election, not the buyer’s), what missing it costs, the death trigger that catches family partnerships unprepared, and the three statutory sections, 754, 743(b), and 755, that do the work.
The Working Capital Peg: The Hidden Number in Your Sale
The working capital peg is the level of working capital a buyer requires the business to have on the day it changes hands, and if you deliver less than the peg the purchase price is reduced dollar for dollar at settlement. It is set by the buyer, calculated from your own historical balance sheets, and it routinely moves six figures on a lower-middle-market deal. Most sellers negotiate the headline price for weeks and accept the peg in an afternoon, and that order of priorities is backwards. This guide explains what the peg is and why buyers insist on one, how the number gets built from your historical averages, why the definition of working capital is worth more than the peg itself, how seasonality becomes a trap, what to negotiate in order of value, and why the post-closing true-up has a tax tail that can require a supplemental Form 8594.
Personal Goodwill in a C Corp Sale: Skip the Double Tax
Personal goodwill is the portion of a business’s value that belongs to an individual rather than to the company, and in a C corporation asset sale it can be sold directly by the shareholder, bypassing the corporate-level tax entirely. On a deal where a meaningful share of value rests on one person’s relationships, that treatment is the difference between one layer of tax and two. It is also a position that has to be true before the sale, not argued afterwards. This guide explains the double-tax problem personal goodwill solves, when it genuinely exists and when it does not, the one document that most often kills it (an old non-compete or employment agreement that assigned the relationships to the corporation), how the money actually moves through two separate transactions, and what a defensible evidence file looks like. The position rests on two Tax Court cases every analysis is built on: Martin Ice Cream Co. v. Commissioner and Norwalk v. Commissioner.
NJ Exit Tax on a Rental: What Nonresident Sellers Pay
New Jersey requires a nonresident selling property here to make a Gross Income Tax estimated payment at closing, the greater of 10.75% of the estimated gain or 2% of the total consideration. It is widely called the New Jersey exit tax. It is not a tax. It is a prepayment against a tax you may not even owe, and where it exceeds what you actually owe, the difference comes back. That distinction is worth real money to anyone selling a Bergen County rental from out of state, because sellers routinely budget for it as a cost when it is closer to a deposit. This guide explains what New Jersey actually requires, the three GIT/REP forms that control the outcome at closing, why the 2% floor so often overshoots the real tax, the depreciation twist that runs the other way, and how to get any overpayment back, sooner rather than later.
The F Reorganization: Why PE Buyers Ask S Corps to Do One
An F reorganization restructures your S corporation into a holding company and a subsidiary before closing, so the buyer can purchase LLC units and get a stepped-up tax basis while you still pay one level of tax. Buyers ask for it because it gives them the depreciation deductions an asset purchase would, without forcing you into an asset sale. That is the whole trade in two sentences. This guide explains what the buyer is actually getting under Section 368(a)(1)(F) and Rev. Rul. 2008-18, why private equity buyers moved on from the older 338(h)(10) election, and the three places the transaction goes wrong when nobody models it before the letter of intent is signed. It also shows, with an illustrative worked example, exactly what the buyer’s basis step-up is worth, because that value is negotiable and sellers almost never negotiate it.
S Corp Disproportionate Distributions: NJ & NY Guide
In most cases, one year of unequal distributions does not automatically terminate your S-corporation election. Whether your S corp has the “one class of stock” it needs isn’t decided by whether cash actually went out in exact proportion to ownership; it’s decided by what your governing documents say. The IRS confirmed this in Rev. Proc. 2022-19, and the Tax Court reinforced it in Maggard v. Commissioner: disproportionate distributions do not create a disqualifying second class of stock as long as your charter, bylaws, or LLC operating agreement give every owner identical rights to distributions and liquidation proceeds. The real danger is a document that grants owners different economic rights, which is why LLCs that elected S-corp status without cleaning up a partnership-style operating agreement are the most exposed. This guide covers the one-class-of-stock test, why LLCs are most at risk, how to fix distributions you’ve already made, how reasonable compensation fits in, and how New Jersey and New York treat the S election differently.
Real Estate Professional Status: The 750-Hour Rule in NJ
For most real estate investors, the tax code contains a frustrating rule: rental income and losses are treated as passive by default, which means rental losses can only offset other passive income, not your W-2 salary, business profits, or investment gains. Real estate professional status (REPS), under Section 469, is the way out of that cage, and one of the most valuable strategies available to a serious investor. But it is also one of the most misunderstood and most audited areas in real estate tax. Qualifying requires both a 750-hour test and a more-than-50% test, and, critically, qualifying is only half the analysis: you must then separately materially participate in each rental activity to deduct its losses. This guide explains both tests, the material-participation step that trips people up, the grouping election that makes REPS practical for a multi-property portfolio, the spousal strategy, and why contemporaneous documentation is the difference between a deduction that holds and one that collapses on audit.
179D and 45L After OBBBA: What Builders Can Still Claim
For nearly two decades, two federal incentives rewarded developers for building energy-efficient property: Section 179D, a per-square-foot deduction for efficient commercial buildings worth up to $5.81 per square foot, and Section 45L, a credit of up to $5,000 per efficient home. The One Big Beautiful Bill Act gave both a hard sunset: 179D terminates for property whose construction begins after June 30, 2026, and 45L for homes acquired after that same date. That deadline has now passed, so this is not an act-fast article, it is a make-sure-you-captured-what-you-are-owed article. If your project began construction, or your homes were acquired, on or before the cutoff, or if you have prior-year commercial buildings that were never analyzed, there may still be significant deductions and credits available. This guide explains what each incentive was worth, how the construction-start timing rule works, and the two ways a developer can still claim value after the sunset.
Real Estate Syndication: Waterfalls, Promote & Carry Tax
When a developer or sponsor raises money from investors to buy or build a property, the deal is almost always a syndication: a partnership where outside investors provide most of the capital and the sponsor manages the project for fees and a share of the profits. How those profits get split, and how each piece is taxed, is governed by two things most investors skim and every sponsor should master: the distribution waterfall and the tax treatment of the sponsor’s promote, or carried interest. This guide explains how the waterfall pays out tier by tier (return of capital, a preferred return of 6 to 9%, a catch-up, then the promote split of often 20 to 30%), what the promote is and how it is taxed, the three-year carried-interest rule under Section 1061, and the two reasons that rule bites real estate far less than it bites hedge funds: most deals are held beyond three years, and Section 1231 gain is excluded from the rule entirely.
Section 263A (UNICAP) for NJ Real Estate Developers
When you build or develop real estate, one of the least glamorous and most consequential questions is which of your costs you can deduct now and which you must lock into the project and recover later. That question is governed by Section 263A, the uniform capitalization rules, universally called UNICAP. For a developer, UNICAP requires capitalizing not just the obvious construction costs but a share of indirect costs, and often the interest on your construction loan, into the basis of the project, so those costs come back slowly through depreciation or at sale rather than as current deductions. That timing shift can materially raise your taxable income in the build years, exactly when cash is tightest. This guide explains what UNICAP makes you capitalize, the construction-period interest trap, the $32 million small-business exemption for 2026, the rental-property nuance that trips people up, and how UNICAP sets the stage for a later cost segregation study.