Article
Recently refreshed tax strategy for real estate developers
March 20, 2023 · Authored by Michael Hurst
The IRS released Revenue Procedure (Rev. Proc.) 2023-9 on Jan. 30, 2023.
This refreshed and streamlined a previous tax strategy, under Rev. Proc. 92-29, available for real estate developers who are contractually obligated to provide common area improvements — either real property or real property improvements — that benefit multiple properties held for sale.
This strategy often leads to deferring taxes to future years by allocating increased costs to properties sold in earlier years.
What Is Revenue Procedure 92-29?
Rev. Proc 92-29 provided developers an alternative cost method to allocate common area improvement costs across the basis of properties sold to determine the gain or loss on each individual property.
The IRS released Rev. Proc. 92-29 in 1992. It allowed developers to allocate the costs incurred for common area improvements during the current tax year plus the estimated future costs for common area improvements over the next 10 succeeding tax years across all benefiting properties in the development — subject to certain limitations — when determining the gain or loss incurred on properties sold in the current year.
Without using the alternative cost method under Rev. Proc. 92-29, a developer would instead only allocate costs incurred in the current tax year over all benefiting properties when determining gain or loss on current year properties sold.
By using Rev. Proc. 92-29, the developer was often able to increase the basis of properties sold in earlier years, reducing their tax liability on the front end of the development and deferring taxes into later years. A key limitation in this strategy was the total amount of common area improvements deducted could not exceed the total amount incurred to date, known as the alternative cost limitation.
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