From left: Carlos Curbelo, Stephen Ross, and Joe Crowley with CityPlace South Tower in Florida and 15 Hudson Yards (Credit: Getty Images and Highrises)
A stalled bill in the House of Representatives would grant luxury condominium developers the same tax benefits homebuilders already receive, saving them millions during construction.
The “Fair Accounting in Condominium Construction Act,” introduced last summer by Miami Republican Carlos Curbelo and co-sponsored by Queens Democrat Joe Crowley, would allow condo developers to defer income tax on condo unit sales until they’ve finished building.
It’s a tale of two tax accounting methods that stretches back decades.
Condo developers are supposed to use the “percentage of completion” accounting method when paying their taxes, meaning they must recognize a portion of their revenues and expenses for each tax year for the duration of the construction contract. But single-family builders get to use the “completed contract method,” under which home sales are not recognized for tax purposes until the construction contract is over.
“You’re busy paying off the bank and the tax man is adding up your theoretic profits even though they’re not real in a cash basis,” said developer Francis Greenburger, founder of Time Equities.
That includes getting taxed on in-contract sales from which the developer is yet to see any money, according to a policy paper by the Real Estate Roundtable lobbying group.
Letting condo developers file their taxes like homebuilders would allow them to not only defer income taxes owed on pre-construction apartment sales for up to five years, but in some cases, also lower their overall tax burdens, said Thomas Castelli, a tax strategist at The Real Estate CPA in New York.
“There may be tax planning scenarios that exist to save stakeholders money in taxes based on the timing around recognizing different sources of income,” Castelli said. Deferred recognition of income could put developers in lower tax brackets during the early years of a development. “But more importantly, deferring these taxes can have a positive effect on cash flow management and reduce the financing costs of a development project.”
For example, deferred taxes can reduce the need to take on as much additional debt, which is common in the late phase of condo construction, when developers sometimes take out “condo inventory loans” backed by unsold units.
So why do Crowley and Curbelo care enough about this obscure tax accounting discrepancy to sponsor a bill? It goes back at least a decade.
After the financial crisis shook the housing market, the Internal Revenue Service proposed accounting changes with the aim of helping builders, according to an article in the Journal of Pass Through Entities. The IRS never made good on the proposed regulatory guidance, however. In 2016, 10 senators signed a letter addressed to then-Treasury Secretary Jack Lew asking for new rules to finally be instituted. Signatories mostly included senators from states with major metro areas, like Democrats Chuck Schumer of New York and Bill Nelson of Florida. Nothing happened.
“Legislation may be the most likely route, in light of all the work ongoing at Treasury, just with tax reform and everything else they’re dealing with right now,” said Ryan McCormick, the tax policy expert for Real Estate Roundtable in Washington, D.C., which has lobbied Congress on the proposed condo bill.
Related Companies, which develops condos in both New York and South Florida, has lobbied Congress on the bill as recently as this summer, federal lobbying records show. Its top executives, Steve Ross and Jeff Blau, are among the top donors to Rep. Crowley’s political action committee, the Crowley Leadership Fund. Blau and Ross each made $10,400 contributions to the fund in December. Related’s lobbyist on this issue, Jon Gans of Polaris Consulting, did not return a request for comment. The penthouse at Related’s new 15 Hudson Yards condo tower in Manhattan hit the market last year asking $32 million.
Other condo developers, including Extell Development’s Gary Barnett and Fetner Properties’ Hal Fetner, also donated to Crowley. Curbelo’s donors include South Florida condo developer Ricardo Vadia and multiple executives from luxury homebuilder Codina-Carr.
A spokesperson for Curbelo did not respond to requests for comment about the bill and a spokesperson for Crowley said they were “going to pass on the opportunity” to discuss the legislation.
Crowley, who is in the lame duck phase of his last term in Congress, recently lost in the Democratic primary to progressive challenger Alexandria Ocasio-Cortez, who criticized Crowley for his ties to developers.
In 2015, Crowley sponsored reform of the Foreign Investment in Real Property Tax Act, or FIRPTA, to encourage more money to come into U.S. real estate from overseas. The bill followed a surge in industry contributions to the congressman, The Real Deal reported at the time.
It’s now been more than a year since condo tax accounting bill was introduced, but it is not currently scheduled for any hearings or markups in the House Ways and Means Committee.
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