Paul, a real-estate professional that lives in Illinois, has recently contracted to sell a piece of property for $3,000,000.  Paul has held this property for a significant amount of time and will be fortunate to realize a $2,000,000 long-term capital gain on the transaction. The transaction is set to close in the next month and Paul wants to take advantage of any potential tax planning strategies to minimize income tax liability. As an accountant that is familiar with basic income tax laws, Paul has requested your assistance to think through some potential tax planning strategies related to real estate opportunities in his home town of Rockford, Illinois.

1. Property A - 40,000 square feet (Opportunity Zone Property)
   1. Property is located at the intersection of Harrison Avenue and Seminary Street.
   2. The property can be purchased for $1,000,000 (split 50:50 land:building)
   3. The property will require $1,000,000 in renovations prior to being rentable.
2. Property B - 40,000 square feet (Like Kind Exchange)
   1. Property is located at the intersection of Harrison Avenue and S. Main Street.
   2. The property can be purchased for $3,000,000 (split 50:50 land:building).
   3. The property is immediately rentable.
3. Property C - 40,000 square feet (Historic Property)
   1. Property is located at the intersection of Harrison Avenue and 11th Street.
   2. The property can be purchased for $1,000,000  (split 50:50 land:building).
   3. Property qualifies as a certified historic tax structure.
   4. In order to meet the requirements of historic preservation, it will cost $2,000,000 in qualified rehabilitation expenditures to renovate the building.

Other Information

• Properties A, B, and C are each 40,000 square feet in rentable space.
• If Paul pursues one of the property’s above, the plan is to hold the property for ten years.
• Sale of the properties is anticipated to occur (ten years in the future) at an estimated sale price of $100 per square foot.
• Paul’s real estate investments are held in name by a single-member LLC that is specific to each property (e.g., Property A, LLC).  For tax planning purposes, an ordinary income tax rate of 40% is assumed.
• Excluding any investment in the properties listed above, Paul anticipates having taxable income of $500,000 per year on his individual income tax return (married filing joint).
• Any funds that Paul does not put into property investment are held in a money market account that earns 2% per year.

1. 
   
2. In Excel:
   1. Compare and contrast the pre-tax and post-tax outcomes of the three different investment opportunities.

Answer rating: 100% (QA)

Property A Purchase Price 1000000 Renovation Costs 1000000 Total I... View the full answer