Stimulus Expansion Provides Tax-Planning Opportunity for Real Estate Businesses

On November 6, 2009, President Obama signed into law The Worker, Homeownership and Business Assistance Act of 2009 (the "Expanded Act"). The Expanded Act includes multiple tax provisions benefiting business and individuals. Of particular benefit to real estate developers, home builders and commercial real estate owners is the extension and expansion of the net operating loss carryback rules, which were originally included in the American Recovery and Reinvestment Act of 2009 (the "Original Act").

A net operating loss ("NOL") is calculated as the excess of business deductions over gross income. Generally, a taxpayer can carryback a NOL for two years and forward for 20 years to offset taxable income in such years. The Original Act permitted small businesses with gross annual receipts of less than $15 million to elect to extend the carryback period for any 2008 NOL (defined as any taxable year ending in calendar year 2008, or, at the election of the taxpayer, beginning in calendar year 2008) from two years to a period of up to five years. This provision allowed qualifying small businesses to carryback 2008 NOLs to the 2003 through 2005 tax years and receive an immediate tax refund.

The Expanded Act extends the NOL provision contained in the Original Act to include losses incurred during 2009 and expands the provision to apply to most businesses by eliminating the requirement that it only applies to small businesses with gross annual receipts of less than $15 million. As with the Original Act, under the NOL provision provided in the Expanded Act, a taxpayer must make an election for the extended NOL carryback period to apply. Generally, a taxpayer may make only one election to extend the NOL carryback period under either the Original Act or the Expanded Act. However, a small business that made an election under the Original Act prior to November 6, 2009, can make a second election under the Expanded Act.

Although the NOL provision contained in the Expanded Act applies to most lines of businesses, the expanded NOL carryback period can be especially beneficial to real estate developers, home builders and commercial real estate owners. Real estate businesses with distressed assets may be able to sell these distressed assets at a loss in 2009. This loss can then be carried back to taxable years during the expanded carryback period in which the business was profitable and receive a refund of the taxes paid in those years. However, calendar-year taxpayers must act quickly to ensure that the sale of these distressed assets close by the end of the year to take advantage of the expanded carryback period.