Miki Okumura Michael O’Malley Goodsill Anderson Quinn & Stifel Honolulu, Hawaii March 21, 2014

Structuring Issues Choice of entity LLC, limited partnership, S corporation Tax basis for debt Tax allocations Passive activity loss rules At risk rules 2

Structuring Issues Stock vs. asset sale Sellers want stock sale Buyers want asset sale IRC Section 338 election Stock sale treated like asset sale 3

Structuring Issues Capital gains tax treatment Developer status – ordinary income Inventory – ordinary income Depreciation recapture – ordinary income Recent developments 3.8% net investment income (NII) tax IRC Section 752 proposed regulations 4

Closing Conditions and Deliverables Purchase price allocation Parties essentially have to agree IRS Form 8594 Tax allocations GET – taxable items Conveyance tax – transfer of multiple properties Real property tax – allocating liability 5

Closing Conditions and Deliverables Closing deliverables Tax clearance certificate Bulk sales report (Form G-8A) FIRPTA/HARPTA withholding – who is the “transferor” if there is a disregarded LLC? 6

1031 Exchanges – Current Issues LandAmerica – QI bankruptcy case Same taxpayer requirement PLR Co-tenancy arrangements Safe harbor for residential property Rev. Proc NII tax – 1031 deferral applies 7

Tax Credits Recent developments Historic Boardwalk Hall (3d Cir. 2012) – federal tax credits disallowed to investor who was deemed not to be a bona fide partner Rev. Proc safe harbor New markets tax credits (NMTCs) 8

Lease Transactions Lease premiums Long-term lease (30 yrs.+) = fee Tax “owner” Depreciation Operating deductions Uneven rents -- IRC Section 467 (below) 9

Foreclosure/Deed in Lieu Transactions Cancellation of debt income (CODI) IRC Section 108 Exceptions “Qualified real property indebtedness” Insolvency Recourse vs. nonrecourse debt Debt modifications 1031 exchange out of foreclosure? 10

Section 467 Rental Agreements Rental agreement for tangible property (a) At least one payment for use payable after year of use; or (b) stepped rents (increasing or decreasing rents) Constant rent accrual rules determine rent for both landlord and tenant Safe harbors and exceptions 11

Passive Activity Loss (PAL) Rules IRC Section 469: PALs deductible only against passive activity income/gains Material participation rules Real property rental activities are per se passive PALs accrue and carry over until passive income is earned or activity is disposed of 12

State Tax – Recent Audit Issues Hotel properties – GET and TAT issues Timeshare properties – GET and TAT issues Owner builder – GET issues 13

Real Property Tax – Recent Developments Tax rates based on actual use Kauai County – effective C&C Honolulu – residential rate for dedicated residential use in non-residential zoned property ($3.50/$1,000 residential rate versus $12.40/$1,000 commercial rate) Exemptions – review of exemption claims, limit on charitable purposes exemption 14

Miki Okumura Michael J. O’Malley