Realco, a real estate developer, is proposing to obtain land and build a small mall that will house five stores. The five stores that lease the property will be responsible for all operating costs (maintenance, property taxes, utilities and repairs, and so on).The project will be constructed in 20X1 on behalf of a group of investors and will cost $700,000, as follows:

Building ………………………………………….	$430,000
Land ………………………………………….	120,000
Parking lot ………………………………………….	40,000
Interest during construction period ……………………………………	30,000
Landscaping ………………………………………….	20,000
Mortgage finder’s fee ………………………………………….	6,000
Legal fees: ………………………………………….
Land purchase ………………………………………….	4,000
Mortgage documents ………………………………………….	2,000
Investor offering ………………………………………….	6,000
Appraisal fee for mortgage ………………………………………….	4,000
Broker’s fee for finding investors ………………………………………….	38,000
………………………………………….…………………………	$700,000

The maximum mortgage available on the proposed property is $450,000. The annual interest rate will be 11%.The only security required for the mortgage is the property itself. Realco has found 10 individuals who are each prepared to borrow $25,000 personally to invest. Its role in the project is now simply to develop the property on behalf of the investors. The ownership structure has yet to be determined. It is expected that the property will be rented beginning in January 20X2 for 10 years at $75,000 per year and that the property will be sold to the tenants at the end of the lease. The sale price will be based on the fair market value at that time. After the property is sold, the ownership structure will be liquidated, with all proceeds going to the investors.

Realco has asked you to prepare a report that analyzes alternative structures for holding the property and recommends the best from a tax perspective. The investors are interested in paying the minimum amount of tax over the life of the investment. Indicate in your report what the maximum tax write-off would be in 20X1 and 20X2, as well as the possible ramifications if one of the investors decides to dispose of his or her interest before the end of 10 years.

Required:

Prepare the report.

* Adapted, with permission, from the 1989 Uniform Final Examination © 1989 of the Canadian Institute of

Chartered Accountants, Toronto, Canada. Any changes in the original material are the sole responsibility of the authors and have not been reviewed or endorsed by the CICA.