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Build-to-rent communities: A real estate opportunity for you?

November 28, 2023

by Phil Wuollet, CPA, M.

Build to rent communities, real estate

Over the last several years, build-to-rent communities have become a mainstay on the Arizona real estate scene. These developments feature single family homes, often hundreds of them, that are built to serve as a community of long-term rentals. More recently, real estate developers around the country have embraced the concept, giving would-be homeowners a reprieve from the nationwide housing shortage and more and more investors the opportunity to get involved.

If you’re wondering if build-to-rent communities could be a good real estate move for you, here are a few key things to consider.

First, what exactly are build-to-rent communities?

Think of a build-to-rent community as a horizontal apartment complex. Instead of shared walls, the units are constructed as standalone single family homes. Residents enjoy the privacy of homeownership with the security and amenities typically associated with gated communities, such as dog parks, fitness centers, pools, and more—all maintained by a property manager instead of an HOA.

As for the appeal to developers and investors: Not surprisingly, build-to-rent communities tend to lease quickly and have lower tenant turnover than vertical developments. The standalone units give property managers easy access to systems, making them more conducive to repairs and renovations.

What’s your intent and its tax ramifications?

Are you building to sell right away, or do you plan to hold on to the building product for the long term? This will determine if you’re looking at capital or ordinary gains.

If your intent is to hold on to the building product for long-term use, a capital gains tax-efficient structure may make the most sense. On the other hand, if you’re looking to make an immediate sale and gains, consider the market risk, as the taxes you save could be lost in the market.

Of course, economics should be your leading consideration when determining your intent: Are you going to make money now through the production and sale of the real estate, when considering the turnover of your investment dollars? Or, would you make more money by holding on to the building product, when considering the increase in market value? The after-tax cash available for either option should be compared when considering your investment tax position.

How will you track depreciation and cost accounting?

Build-to-rent communities are comprised of multiple asset classes, which can make cost accounting a challenge. Calculating depreciation on the community’s streets and exterior property will be different than its buildings and interiors. There can be significant tax savings if the costs are accounted for properly when considering bonus depreciation.

For this reason, it’s important to have an accounting system in place on the front end that can accurately track the project’s depreciation and cost accounting.

What are your state’s sales tax rules?

In Arizona, we have a speculative builder sales tax, which is a city sales tax on the sale of the property within 24 months of the build. (It applies only to speculative builders.) Even if your original intent was to hold for 24 months or more, you would be required to pay this tax if you sold within this window.

Bottom line: If you’re planning to develop a build-to-rent community with the intent to sell in the near term, be sure to check your state and local tax rules first.

Build-to-rent communities: The right real estate opportunity for you?

The points I’ve mentioned above are just a few of the things to think about when considering build-to-rent communities. Determining who’s paying for it should of course be at the forefront of the decision as well as current construction and labor costs. The advisors at Abdo are here to help you shine light on your real estate options, so you can move forward with confidence.

For guidance on if build-to-rent could be a good opportunity for you, contact us today.


Meet the Expert

Phillip Wuollet, CPA, M.

Phil leverages teamwork to integrate tax planning into the larger scope of business strategy, helping light the way for economic and operational success.

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