How are tax losses different than operating losses in real estate?



How are tax losses different than operating losses in real estate?

In: Economics

So real estate normally involves pretty long term assets being buildings. Although you spend a lot of money on buying or constructing the building you can’t claim all that expense upfront because it’s seen as capital.

GAAP usually wants you to blindly write the building off over 40 years. IFRS wants you to consider what the residual value of the building will be and depreciate down to that value – with many buildings now not being depreciated under IFRS because there’s no discernable drop in value (especially if you are a real estate developer – then you are treating those buildings as stock).

Tax treatment ignores accounting standard’s treatment and for commercial and industrial buildings is normally much more generous (exact treatment depends on your country sometimes state too) – because governments want to encourage trade and industry and also there certain bonus tax deductions that you may get in regards to the specific area where you are building and things like whether you’re using green energy / being energy efficient.

And so you may not be showing an operating loss on paper but for tax purposes the building has already generated significant tax breaks for you – and you don’t not claim those tax breaks because you haven’t generated a profit yet – you take them as soon as you can get them and carry them over as an assessed tax loss.

Also tax breaks aren’t necessarily limited to the cost of the asset and can in certain circumstances exceed the cost of the asset (again this is very dependent on your tax jurisdiction).