Financing decisions to discuss with your tax adviser

Why tax-stack and debt-stack coordination matters

Most after-tax-IRR slippage on a CRE transaction does not come from getting the tax plan wrong, it comes from the placement team and the tax team not coordinating. A §1031 exchange that fails because the lender's commitment letter slipped past day 180 converts a tax-deferred sale into an immediately taxable one. A QOF construction loan with slow draws threatens the QOF's 90% asset compliance at the next six-month testing date.

This is sponsor-POV process commentary, not tax or legal advice. Bring a CPA and tax counsel onto every transaction described here. The integration points themselves, the lender, equity, and counsel touchpoints, are what this pillar covers.

§1031 like-kind exchanges and replacement-property debt

IRC §1031 allows deferral of capital-gains tax on the sale of investment real property when the proceeds are reinvested in like-kind replacement property within 45 days to identify and 180 days to close. The IRS publishes the operative guidance in IRS Publication 544 and the §1031 regulations.

The most common cause of §1031 failure is the replacement-property loan not closing inside the 180-day window. A signed term sheet does not satisfy §1031, the IRS recognizes the closing, not the soft commitment. Lender bake-off should be in flight before the relinquished property closes, not after.

Replacement debt should match or exceed the relinquished-property loan balance to avoid mortgage boot. Mortgage boot is the taxable gain triggered when replacement-property debt is less than relinquished-property debt, the reduction in mortgage liability is treated as cash received unless offset with additional cash equity contributed by the sponsor.

• Start the 1031 calendar before the relinquished property closes, most failed exchanges identify replacement property too late.
• Push the lender for a commitment letter inside 180 days, not just a term sheet.
• Underwrite replacement-debt size at or above relinquished-debt balance.
• On reverse exchanges, confirm the lender will close with EAT (exchange accommodation titleholder) structure in title.

Opportunity zones and QOF construction-loan timing

IRC §1400Z-2 created the qualified opportunity fund (QOF) regime. Investors who roll capital gains into a QOF defer recognition of the original gain to 2026 (or sale of the QOF interest, whichever is earlier) and, after a 10-year hold, eliminate tax on QOF appreciation entirely.

QOF projects must satisfy a 90% asset test at every six-month testing date. The substantial improvement test requires QREs to equal or exceed acquired basis (excluding land) within 30 months. Construction draw schedule timing is what makes or breaks QOF compliance.

Working capital safe harbor under §1400Z-2(d)(2)(D)(i) typically gives 31 months to deploy reasonable working capital. The construction lender's draw schedule needs to align with the safe-harbor deployment timeline and the six-month asset-test cadence.

Cost segregation, bonus depreciation, and lender disclosure

Cost segregation is an engineering-based study that re-classifies portions of building basis into shorter-lived asset categories (5-, 7-, and 15-year property) to accelerate depreciation deductions. The IRS Cost Segregation Audit Techniques Guide is the operative reference.

Bonus depreciation under IRC §168(k) allows immediate expensing of qualifying short-life property identified in a cost-seg study. The percentage was 100% through 2022 and is phasing down 20 points per year until full sunset.

Critical clarification: cost-seg accelerates depreciation but does not change loan sizing. Lender DSCR is calculated from NOI, which excludes depreciation. The benefit of cost-seg and bonus depreciation is investor distribution timing: a larger first-year tax shield boosts year-one cash-on-cash to taxable LPs.

Disclose accelerated depreciation in the offering memo. UBTI exposure to tax-exempt LPs increases when depreciation is accelerated, and depreciation recapture exposure at sale (typically 25% federal rate vs. 20% capital gains) is correspondingly larger.

UBTI for tax-exempt LPs and the §514(c)(9) workaround

When pension funds, endowments, or IRAs are in the equity stack, debt-financed property triggers unrelated business taxable income (UBTI). The leveraged portion of the otherwise tax-exempt LP's return becomes taxable at the corporate rate.

The §514(c)(9) qualified-organization exception is the standard workaround for qualified pensions and certain educational endowments. The fund's debt structure must satisfy specific tests, including the §514(c)(9)(E) fractions rule on partnership allocations.

When §514(c)(9) doesn't fit the LP base, REIT-blocker structuring is the alternative. Convert the otherwise UBTI-generating real-estate income into REIT dividends, which are not UBTI to the tax-exempt holder.

Depreciation recapture and the 1031 vs. taxable-sale decision

On the sale of depreciable real property, the portion of gain attributable to prior depreciation is taxed at a maximum 25% federal rate (unrecaptured §1250 gain) rather than the lower long-term capital-gains rate.

Aggressive cost segregation increases recapture exposure at sale because more basis was depreciated through the hold period. A cash-out refinance does not trigger recapture; only a sale does.

When deciding between a 1031 exchange and a taxable sale, model the recapture component separately. The recapture deferral via §1031 is often more valuable than the headline capital-gains deferral because the recapture rate (25%) is higher than the long-term capital-gains rate (20%).

C-PACE in the capital stack and senior-lender consent

Commercial property assessed clean energy (C-PACE) financing is structured as a property-tax assessment, which sits senior to the mortgage in most state statutes. Senior lender consent is required and varies materially by lender category.

Banks tend to be more flexible on C-PACE consent than CMBS, bank perm loans typically include a C-PACE assessment carve-out from default upon pre-clearance, while many CMBS securitization documents prohibit any senior-lien assessments without bondholder consent.

Treat C-PACE as a structural disclosure item pre-LOI. Confirm the senior lender's posture before signing the C-PACE term sheet and align the closing schedule.

§179D energy-efficient buildings deduction

IRC §179D allows a deduction for energy-efficient commercial building property (lighting, HVAC, building envelope) placed in service that meets prescribed energy savings. Inflation Reduction Act amendments expanded eligibility and increased the deduction amounts.

§179D is a deduction (not a credit) but can produce material first-year tax benefit on a development or major renovation. Coordinate the §179D study with cost-seg and bonus-depreciation modeling to avoid double-counting.

Government and tax-exempt building owners (designed by the architect or engineer) can allocate the §179D deduction to the designer. This is a sponsor-relevant negotiating chip in design-build contracts.

Tax credits in the stack, coordination with senior debt

LIHTC, Historic Tax Credit, NMTC, and IRA energy credits change senior-loan sizing because credit equity is paid in over time, not at closing. Bridge debt covers the gap between construction draws and the equity pay-in milestones, covered in detail in the tax-credit-bridge financing pillar.

Senior lenders need disclosure of the full credit-equity pay-in schedule and the bridge structure in pre-LOI underwriting. Bank perm and life-co perm have different appetites for take-out behind tax-credit construction; CMBS exposure is rare on credit deals.

Foreign capital, coordination touchpoints

When foreign capital is in the equity stack, FIRPTA, REIT-blocker structuring, treaty position, and CFIUS clearance all become coordination touchpoints, covered in detail in the foreign-capital and FIRPTA-blocker pillar.

From the placement-team perspective, the key coordination items are: (1) lender KYC of foreign-controlled SPE borrowers; (2) confirmation that REIT-blocker structuring does not violate senior loan SPE covenants; (3) CFIUS clearance schedule built into the closing condition list.

What the placement team owns vs. what tax counsel owns

Tax counsel owns the §1031 documentation, QOF formation, REIT-blocker structuring, side-letter MFN tracking, and §514(c)(9) compliance opinions. Placement owns the lender comparison, term-sheet redline, lender consent management, closing-condition-schedule coordination, and bridge debt sizing.

The integration points, where things actually break, are the calendar, the SPE-borrower structure, the lender's KYC and SPE diligence, and the closing-condition list. The placement team should be in tax-counsel-led calls from kickoff, and tax counsel should be in lender comparison calls from term-sheet redline forward.

Working tools

The CRE §1031 debt-replacement calculator tool sizes the minimum replacement loan needed to avoid mortgage boot, computes equity-boot exposure, and lays out the 45/180-day timing math with a fully-numbered worked example. Use it on every §1031 exchange where the relinquished property carries debt.

The capital-stack tax crossovers topic hub aggregates the Q&A library covering specific mechanics, 1031 timing, OZ loan structures, cost-seg vs. loan sizing, UBTI mechanics, C-PACE tax treatment.

Frequently asked questions