Real Estate Tax & Accounting Insights for Year-End Planning

Katharina Casey: Thanks, Alonzo. Hi, everyone. I'm going to be talking about real estate professional rules and some of the things that we've been seeing. We've been seeing an uptick in IRS audits, scrutinizing real estate professional determinations. So I wanted to stress the importance of substantiation that's required to qualify as a real estate professional.

First, I'm going to go over the background of real estate professional rules, which are tricky. So you're not going to be an expert after this, I'm sorry to say. We'll go over some recent court cases and go over what the courts found that failed to provide that substantiation, and then we'll also go over best practices.

So when we talk about rental activity, the general rule is rental is always passive. And so, I guess before we get into passive rules, I want to make sure that we know that we need to have basis in order to take any losses. And so, we need basis, at-risk basis, and then we have to see, are these losses passive and are they going to be limited, or are they going to be nonpassive? And then we have, starting in 2021, our 461(l) excess business loss limitations. So we have four hurdles before we can actually take a loss on a return. So I just want to make sure everyone's aware of that.

But again, generally, rental is always considered passive, unless we have an exception, which we'll go over on the next slide. So if you have passive losses, they can only be offset against other passive income. The losses are carried over until you dispose of the activity, or if you have passive income from another activity, you're able to offset it.

The Form 8582, that form is used to track your losses that are allowed or suspended from prior year, so it's not like the losses disappear. And then if you do end up having passive income, it is subject to the net investment income tax of 3.8%. Some states follow the Fed. Some states have their own rules. You want to be aware of where you're living, so your state residency return, and also where is your property located, and you have to follow the rules for those states.

So now we'll go into the exception for the rule, so our real estate professional designation. So if you are able to meet these quantitative tests that you can say that you're a real estate professional and your activities are... The losses are then changed from passive to nonpassive, and then we're not subject to the net investment income tax, and we're able to take those losses now. So everyone wants that, right? But these tests are hard, so let's go over them.

First, you need to perform more than 50% of services in real property trades or businesses. So you need to be really in there spending most of your day in real property trades or businesses. The next test is 750, is really that de minimis. You need to spend at least 750 hours in real property trades or businesses. And then we need to show that we materially participate in each rental activity.

Again, this is a determination that's made year by year. It's not an election. Really, I would say, for this, you want to look to see what are you doing. We're right here at the end of the year. Maybe reflect on 2023. What activities were you doing throughout the year in real estate? Are you meeting these tests, or do you want to think about this for 2024 just as making sure that you're doing those activities?

And then there's an aggregation election that you can combine your rental activities into one for purposes of material participation. It gets a little tricky. So I just want to make that note there that you can make an aggregation election. So that's where the election comes into play. But again, real estate professional is a determination.

The one thing I do want to note is, just because you are a real estate professional, it doesn't make your rental activities nonpassive. Rather, you need to show that you materially participate in those activities to be treated as nonpassive. All right. So some benefits of being a real estate professional. Like I said, those losses are treated as nonpassive. So you don't have those passive loss limitations. You're not subject to NII.

However, you might not want to stretch yourself and put in all that extra work into real estate activities. Maybe you do want those losses to be treated as passive if you have other passive income and you want those two to offset. So I just want to say that it might not be beneficial depending on what other investments you have. All right. So then we're going to identify what is a real property trade or business is. So they provide 11. I think these are pretty straightforward, what you would typically think of when you think of real property trades or businesses.

Like one of my bullet points I have on here, unless you're directly involved in the day-to-day management of the activity, work done as an investor is not counted towards hours of material participation. And we're going to see that in some of the court cases that we'll go over. Here's our seven tests for material participation. You need to pass at least one of these seven tests to claim that you materially participate in that activity.

Just wanted to note that if you own your rental activity through an LP, you can only look at three of the tests. So that would be test number one, test number five, and test number six. Typically, most people think of the first test, the 500-hour test, but there are other thresholds that you could meet to pass one of these tests for material participation.

All right. And here's our list of examples. Again, not all-encompassing, but just things that you would typically see of activities that would be good activities that would qualify for those material participation tests. So we're advertising. You're negotiating the lease. You're collecting rents. You're involved in that day-to-day. You're really putting that work into your real estate activity.

And then on the right side, we see examples of activities that don't qualify. So that's really what I have listed here. That really sounds more like investor activities. So unless you're involved in the day-to-day, unless you're in the management company, unless you're really in there, those types of activities would not qualify for material participation.

So I have this slide called Pitfalls. I mean, really, sometimes they call these sleepers. With the employee hours, I just mentioned about the management company. If you work for a management company or you work for a real estate company, your hours don't count from that entity unless you're at least a 5% owner. So you need to at least own 5% of that management company or of that entity in order for those hours to count. So just make sure that you're aware of that.

And then we also have, there are some nuances with married taxpayers. We'll also see this in some of the court cases we'll go over. You're required to count the hours from both spouses for the material participation test. However, only one spouse has to meet the 750-hour requirement. You can't then take those same hours and combine them to meet that 750. At least one spouse has to meet the 750 requirement. And then there's, if you're filing, married filing joint and married filing separate, how that plays out.

All right. So substantiation is key. Contemporaneous documentation is best. It's not required. What they say is, so daily time reports, logs, documentation to the extent of what you're doing in that activity, what is reasonable means. It's including the identification of services performed over a period of time, the approximate hours that you're spending. You could look at appointment books, calendars, and narrative summaries of what you're doing.

Really, it's on the taxpayer to substantiate what they're doing throughout the year in their real estate entities and activities to prove that, "Yes, I am a real estate professional. This is what I'm doing day in and day out." Post-event ballpark guesstimates, unverified documentation is not going to be sufficient, and we'll see as we go through these court cases. "Our taxpayers did provide documentation, but there were a lot of estimates in there and the IRS did not accept them."

All right. So we get into our first court case. So we have Dunn versus the Commissioner. We have a husband and wife. They own properties individually and through an LLC. There are some entities that they hired a management company to manage, and then there are some entities that they are doing the work. They kept logs to substantiate their hours. They did not elect to aggregate the activities together, so then each entity or each activity is looked at separately for the hours test for the material participation.

And what the courts came back and said were the logs were vague. They couldn't tell who was spending the time. Was it the husband? Was it the wife? The other thing I should mention is that they both had full-time jobs as computer specialists. So when are you sleeping? How can you have a full-time job and still qualify as a real estate professional? It's really tough, especially when going over that 750-hour minimum. And you have to look to see, are you spending more... You have to have more than 50% of your time being in real estate.

So they failed both. They were unable to show that they spent more than 50% of their time in real estate and they were unable to show that they met the 750-hour test separately. Neither spouse was able to prove that. There was a 20% penalty that was assessed too. So not very friendly for the Dunns. So then we get into the Sezonov case versus the Commissioner. Again, another husband and wife. The husband had an HVAC business that he was the only owner of. The wife was involved in the day-to-day operations. So this sounds good. Maybe his wife was working a lot in these real estate entities. So far, it's not too bad, right?

However, when they submitted the documentation to prove, to substantiate her hours and the husband's hours, it wasn't contemporaneous. They were basing it on the estimated rental agreements. It was, again, unclear who was working in the hour. Was it the husband? Was it the spouse? And I think when they ended up submitting the hours, they were both under the 750. So if you combine the hours, they were over the 750, but neither of them had 750 hours in either year that were under audit. So you need to have at least one taxpayer meet the 750. So they fell short. And so, their losses were treated as passive losses.

So here comes our last case. We have a taxpayer who was an attorney. Again, you have a full-time job being an attorney, and then you're also saying that you're a real estate professional. He hired management companies to take care of his entities, and then the onus is back to the taxpayer approving his hours. What was his time spent in real estate?

He provided his handwritten calendars and services that he worked and the hours that he worked on the real estate entities. The one thing that the courts noted is that he did not really prove how many hours he spent as an attorney. I think he said, I think it was like three hours, three days a week. However, the income that he received as an attorney was much greater, was pretty substantial. So the courts looked at it and said, "No. You're spending more time being an attorney than you are as a real estate professional."

In addition, in the documentation that he provided with the activity that he was doing, a lot of it sounded like investor activities and activities that the management company is actually doing. So because he's not an owner of the management company and he's not involved in the day-to-day, we were unable to count those activities for the material participation test.

All right. So here's my last slide. I pulled out a couple questions and techniques that I saw on an IRS audit guide. However, I want to note that it was published in 2005. So it's been some time since it has been updated since 2005. But just so you know, it kind of gives you an idea of what the agents are going to be asking in the initial interview and how you should really be looking at your time. I think one of the questions was...

I mean, really, they want to see reasonable records that not only provide what services are being provided, the approximate hours spent. So when you think about it, how many hours do you spend looking at emails a day? Would you say eight? Would you say five? Would you say 25 minutes? When you think about it, it might not be as much time as it actually is. And I think the other thing is you just want to also look at, what are your other activities? Are you involved on boards? Are you involved in other areas that are not real estate that could trip you on that greater-than-50% test?

So that's all I have. I know there's been a lot of questions that are coming in. I'm going to take a look at them, and then I'll get back to you via email, or maybe at the end, I'll be able to answer some of these. So thank you so much for all the questions and the engagement. Alonzo, I'm going to pass it back to you.

Alonzo Mitchell: All right. Thanks, Kate, for our real estate professionals update. And now, I'm going to hand it off to Alyssa, who's going to give us our audit update. Take it away.

Alyssa Dolinshek: Thank you, Alonzo, and good afternoon, everyone. For the audit update portion, we will be covering the following topics that are important to give extra consideration given the current economic environment. The three areas we're going to cover today are debt modifications, going concern, and fair valuing of assets. Debt modifications and restructurings continue to be a hot topic as companies are contending with economic uncertainty and facing rising interest rates, impending maturity dates, covenant violations, cash flow constraints, or even changes in underlying collateral values.

The accounting impact of a debt restructuring depends on the surrounding facts and circumstances and requires companies to navigate accounting guidance that can be pretty complex at times. There are three models that could be applicable depending on the facts and circumstances: troubled debt restructuring, debt extinguishment, or debt modification.

The first scenario to consider is when debt is restructured with the same lender, has a troubled debt restructuring or TDR occurred. This is important because of the accounting for TDR can differ very significantly from the accounting for a non-TDR. For a debt restructuring to be considered troubled, an entity must be experiencing financial difficulties and the lender must grant a concession.

If the transaction is not considered troubled and the transaction is still with the same lender, the next step is to determine whether the transaction is a debt extinguishment or modification. The determination should be based on the economic substance of the transaction, regardless of its legal form. The analysis requires a present value calculation to determine if the change in contractual cash flows between the original debt and the restructured debt is 10% or greater.

This assessment has several nuances that can often be overlooked. For example, are there changes in principal amounts that should be treated as day one cash flows? In addition, if the debt is prepayable, then a separate cash flow analysis needs to be performed, assuming whether it's exercise or not exercise, and the scenario with the smallest change is what should be used. If the change in cash flows is 10% or more, the restructuring is accounted for as an extinguishment. Otherwise, it's a modification.

Once management has completed their analysis and determined if the transaction is a modification or extinguishment, how do you treat both the new and old fees that were incurred? This table helps to summarize the differences in treatment depending on each scenario, assuming this is with the same lender. If the transaction is an extinguishment, original costs will be written off, fees paid to the lender will be expensed as part of the loss on extinguishment, and fees paid to third parties will be capitalized and amortized.

If the transaction qualifies as a modification, original costs continue to be amortized over the modified term of the loan, fees paid to the lender will be capitalized and amortized over the modified loan term, and any fees paid to third parties will be expensed. For additional guidance, please also refer to ASC 470-60 and FASB's non-authoritative paper on debt modification.

There are several other questions to ask or consider when going through or considering one of the previously discussed debt transactions. Is going concern assessment needed? Are all debt covenants still being met? Has liquidity been impacted negatively? It is also important to consider the timing of any debt-related transactions and ensure that all facts and circumstances are considered as of the balance sheet date and, again, prior to the audit issuance to determine if any subsequent events have any impact that need to be reflected or disclosed.

One other less common consideration is if there's an impact on the balance sheet classification. For example, some debt restructurings after the balance sheet date, but before issuing the financials, may change the terms of the debt. And as a result, your amount due within one year from the borrower's balance sheet date may change. These restructurings may result in reclassification of all or a portion of the carrying amount of debt as of the balance sheet date.

The next area to consider for the upcoming audit season is with fair valuing assets. Typically, in real estate, this arises as part of an impairment analysis or as part of a purchase price allocation. Given the current economic environment, there will be more scrutiny on the underlying calculations companies use to arrive at an asset's fair value. The two most common valuation methods are the market approach and the income approach.

The market approach utilizes third-party appraisers who conduct valuation by comparing to the values of recently sold similar properties in the area. Items to consider if using the market approach relate to the quality of the market data obtained. As real estate has been relatively volatile over the past year, it's important to spend more time reviewing appraisals received.

There should be an emphasis on considering also qualitative characteristics of the asset as well as comparable assets to determine if the market used is still appropriate for the asset being valued. Is the market that they're in stabilizing, or are there external factors that could be artificially inflating or deflating the value? And also, are there any future trends that are expected that could impact the value of the appraisal?

The other common valuation method is the income approach, which involves developing a model to value the future cash flows of the property. Under this method, it's important to evaluate the various inputs to the calculation. For this approach, it's important to be aware of volatility of cap rates in the current market, which will be discussed in more detail in the next segment.

In addition to reviewing all your inputs, it's necessary to take a step back after you've done all your calculation. You need to evaluate whether it's reasonable and if it's falling on the scale of too conservative or too aggressive. The company needs to ensure that they can support the valuation position that they take.

Now that we've gone through the key concepts surrounding debt modification and fair valuing of assets, let's move on to the overarching topic to be prepared for during your year-end audits, which is going concern. This analysis is prepared by management for the purpose of demonstrating that the company can sustain itself. The period that you need to consider for your going concern analysis is one year and one day from the anticipated audit issuance date, not just your balance sheet date.

Indicators that there could be a potential going concern include, but are not limited to, maturing debt, trends of negative cash flows from operations, a major loss of a tenant, you have low or struggling occupancy, or assets that are deemed underwater. The presence of one or more of these indicators does not necessarily mean that you have a going concern. There are a variety of mitigating factors that can alleviate a going concern.

As previously discussed, debt restructuring or modification is expected to be the most common mitigating event. However, unlike in the past, where refinancing was relatively easy, this is not the case in the current environment, and the risk related with maturing debt is very high. Therefore, companies need to demonstrate the status of how they're working with their individual lenders to address this concern. There are also other possible but less common mitigating tools available, such as obtaining other forms of funding or, more drastically, to make a change in the business operations.

If debt, however, is the driving force behind your going concern analysis, do not wait until the end of the year to start discussing this with your auditors. It's best to bring it up and get ahead of the game to tell them your plans and what you're working on. The impact these situations would have on whether or not going concern exists should be properly analyzed and disclosed as appropriate. It's also important to stress that receiving an audit report with a going concern, while not the most favorable outcome, does make the situation transparent to the users of the financial statements, which is the ultimate goal. Thank you again for your time, and back to you, Alonzo.

Alonzo Mitchell: Thanks, Alyssa, for our audit update. And now, last but not least will be Mark, who will give us a real estate market year-end update. All right. Take it away, Mark.

Mark Roszkowski: Thanks, Alonzo. Yeah. As Alonzo mentioned at the onset of the presentation, I'll try to discuss what's on a lot of our clients' and peers' minds, which is, "Where are interest rates going? What are they doing to the cap rates? Does that put us in a buyer's market or a seller's market? What should I be doing now?" So I'll try to answer all of those questions in the upcoming slides, and then I'll close it off with everyone's favorite topics, ESG and artificial intelligence. So let's get started.

I figured I'd start the market update with sort of an outlook on where interest rates are going. Right? We know where they have been. We know they're currently at 525 to 550 basis points. And pretty much, the Fed has taken a higher-for-longer stance. So in today's meeting, in the upcoming meeting, pretty much 100% consensus, using the well-respected CME FedWatch Tool, that we won't have a rate decrease.

But in the upcoming March meeting, we notice the consensus is still not an expected decrease, but pretty much the takeaway is, don't expect it to be a shock if we do get a rate decrease. And then I think as the year moves on in 2024, as we get into the May, June, July, September, November, December months, the expectation is interest rate decreases.

So what does that mean? Right? In 2023, we had a vast increase in interest rates, if you could tell by the end of this chart, which I'm showing right now. But what I'm trying to prove in this chart is we've been in this situation before. I've personally been in this situation during the '08-'09 era where we had a rampant increase in interest rates and then it was a lot of turmoil. I know we're projecting or hoping for a soft landing. So looking at a recent historical chart, we've achieved it before. It's possible. But right in this '94, '95 to '04 section, as you notice, we've had turmoil.

Yeah. Just kicking back to the turmoil I experienced personally was '08-'09, client transition. I think I was doing certain tasks in the real estate industry, and then all of the resources were utilized to mortgage-backed securities. This new concept came about, re-REMICs. I don't know if anyone remembers those, but we were taking previously rated securities, AAAs, AAs, and repackaging them, basically unpooling the toxics and repooling the prime assets just to be able to sell them and then write off the toxics.

Yeah. Pretty much the takeaway is, we're hoping for a soft landing, but we've been in this situation before. Yeah. Who knows what will happen? Yup. And as mentioned, the interest rate has soared 525 basis points. So what that's really doing to companies is eating away at their cash flow. Right? So if you have floating-rate debt, now you're basically paying more. So you need to cut other expenses to be able to service that debt.

So now we have a better understanding or our views of what's happening with interest rates, what was the projections in the future. But at the end of the day, in the real estate industry, we all talk in capitalization rates. Right? So a lot of the questions came in just, "How do interest rates translate to capitalization rates?" So I tried to put a case scenario here and just a brief explanation, which I'll read through. Right?

So the impact of higher interest rates on property values is twofold. Properties are valued on a multiple, a cap rate, of NOI, net operating income, and interest rates on the rise, which is the current scenario. Borrowing costs are basically no longer accretive to the unlevered yield that many properties were purchased at. Right? So you purchased a property within the past couple of years, and all of a sudden, your unlevered yield is not what you were expecting.

Yeah. For example, I think the best case I could have came out with was a 200-basis-point cap rate expansion from 4 to 6%. That essentially eliminates approximately 33% of the property value, and that's the current environment we're in. Right? So this 2% is basically an increase in the investors' required return of math, the calculations, to make the investment financially viable to them.

Yup. Another explanation for this 2% increase is, this increase corresponds to the additional return investors seek reflecting a change in their perceived risk or opportunity cost associated with the investment. Right? So there might be better opportunities, but that's how the market is pricing real estate at the moment.

Yup. And just an explanation on the NOI multiple, right? So in my 33% case example, your NOI, basically, return gets compressed from 25% to 16.67. This decrease in the multiple signifies that investors are willing to pay less for each dollar of NOI the property generates. So I just gave a little overview and background to prepare us for the next slide, now that if we didn't have a good understanding, hopefully now we have a good understanding of how interest rates play into cap rates and now where we are.

So as of Q3, PwC released a good survey, which I'll just analyze, which we've been discussing internally and pretty much where we've been. Let's start there. Right? So historically, the average quarter and average annual overall cap rate increased, essentially no declines. We see that here. Right? And we notice when cap rates increase, basically, properties are losing value. Looking forward, the expected shift in the next six months, most investors still expect the cap rates to further increase.

Second highest? You know what? There's some hope that they'll hold steady, but almost no consensus on a decline. So take that for what it is. But there's an interesting takeaway here. Right? So the expectations that real estate investors have for the upcoming six months, they do not factor in this interest rate decline, which are portrayed in the onset slides a few slides ago. Yup.

But the interesting thing about cap rates are they're lagging indicators, particularly in the slower-moving market. Yup. They often reflect past transactions and historical market conditions. Right? So interest rates needs to fall, and then eventually, once the market prices that in, then cap rates will change. And then, so all this talk about interest rate, cap rates, and what does that mean? Right? At the end of the day, we throw around these terms, but I think the gist is, "Hey, what sort of market are we in? Are we in a buyer's market? Are we in a seller's market?"

I think it's always a good time to be in the real estate market. But essentially, it depends on what side of the market you're on. Right? So clearly according to this, the most recent numbers, it's a good time to be a buyer, because obviously, I'll show in the next slide, cap rates are causing discounts. Yup. And just some specific industries. I think the best industry right now is the net lease industry. Great deals in the market. While we look at storage and medical, yeah, not so much. But also, there's some hope, right? It's not necessarily a full buyer's market.

If you have a neutral... Right? Most people are waiting on the sidelines. So they're waiting for clarity on the U.S. economy. They're waiting on clarity on capital markets. They're waiting on the commercial real estate marketplace to show consistent signs of improvement, then we'll see this sort of average out. But as of the latest study, I'd say it's a buyer's market, or wait and hold.

Yup. As mentioned on the previous slides, the reason why we're in a buyer's market is because we're trading at a discount. And I think with this slide, what I'm trying to portray is, we've been here before. Right? We've touched this point many times historically, but we actually haven't crossed this sort of red line, which we did in '98, '99, and whatnot. So we still can turn further south. Basically, we're at an 80% devaluation.

Yeah. And pretty much just to tie this into my initial interest rate slide, so the impact of higher interest rate is the dominant force in the commercial real estate right now, and the repricing of income streams has created a frozen transaction landscape. So owners currently would prefer to hold and most buyers would prefer to wait for an even lower price, basically wait and see, TBD. Yeah. And just a positive take on this chart is, things always revert. So we see in the '02, '04 era, valuations were 20% overvalued. And going back even further historically, they've been 30% undervalued. So it's just the current state of the market.

Yeah. Just switching towards everyone's favorite ask right now. What are we doing with ESG? What is ESG? I know we throw a lot of acronyms around, so maybe I'll just spend a couple of seconds just describing ESG. So it stands for the environment, social, and the government. Right? So at the end of the day, investors pay a premium or pay a discount on a specific company or whatnot based on these standings. Right?

If you're environmental and there's a specific investor that goes towards that climate change and that strategy, then the score becomes very relevant for you. Social. If society doesn't value what your company invests in or stands for, then they could devalue or this investor could say, "Hey, this is not what I want to spend my money on." And governance. Pretty much, how are your internal controls within the company? Has there been any legal issues or whatnot?

So all of these issues now are becoming prevalent, and the industry is assigning scores to some of these issues, which that's where the market's going, including real estate. Specifically in relation to the E in ESG, the environment, what's a big takeaway I found was this increase in billion-dollar climate events. So in 2023, this year, there have been 23 events that were over billion-dollar costs versus historically. The number is just going up. And at the end of the day, someone needs to pay for these costs. It's not always the government, and sometimes it's the company. So that's why these ESG scores are so prevalent nowadays.

Yeah. It's a very interesting point, another thing. Within Eisner, we actually hosted a very cohesive, with a lot of these companies I listed here, event on ESG last month. Some of the key takeaways I just like to bring up, right? There are tax incentives for building operators and owners of sustainable real estate. Right? So the government does support these causes.

Like I mentioned before, certain investors, they require ESG specifics to even begin considering their capital infusion. Right? So they want you to meet this environmental level, the score, this governance score, this social impact score. So all these are valuable things that are coming into our industry. And just an interesting story I figured I'd bring up from the event, which I would never realize: So a railroad operator, they had to shut down. This is their primary business. All of their cash flow is generated from the operations of this railroad.

They had to shut down for a few months because this railroad track never received such hot or climate-related conditions, and the rails expanded. So all of a sudden, the railroad company had to hold service. They're basically cash flow zero for a few months. And obviously, that has a bottom-line impact. If you're a public company, basically your shares are being devalued. So it's good that we're getting ahead of this. We're assigning scores, and that's where the industry is going.

Another interesting fact related to ESG, because we're all in real estate just looking for a return on investment. It's an asset class. And just touching on the ESG subject, we do have aggressive timelines set to reach net-zero carbon emissions through 2050. International governments are exploring all options in the next generation of power production. U.S. President Joe Biden has been hugely pronuclear, which has opened the doors for increased investment into the industry.

Interestingly enough, I was shocked by this, but nuclear power meant zero greenhouse gas emissions during operations. They can get a viable energy option for net-zero climate ambitions. What does this mean? We're going to need real estate and we're going to need land to build these future nuclear power plants. And what powers nuclear power plants? It's uranium. It's nuclear fuel. Yeah. What I found very interesting, it has the highest post-COVID return to date, with orange juice being the closest competitor, far away from any other asset class, including any equity market or any real estate asset class.

And just to provide clarity on this chart, it's basically showing the performance of the Sprott Physical Uranium Units index, and it's shown a 500% increase since April 2020 to where we are in 2023. Substantial growth, assuming a zero value in April of 2020, the onset of COVID. Yeah. While thinking about artificial intelligence, AI, obviously, it comes up in a lot of conversations.

Debating where to take this presentation, I know there's artificial intelligence concrete providers now where they automatically program a computer to automatically lay the concrete. We also have building blocks that you could preorder online and then they'll come and you just sort of build your house together like a LEGO set. And there's one more interesting example that comes to mind. I'll bring it up.

But at the end of the day, these are very niche. So if you're looking at this chart, I would classify those in the bottom section of this chart. If I didn't highlight this chart in yellow, this would basically be no strategy. So at the end of the day, there are these niche artificial intelligence plans, but the real estate industry isn't really adopting them overall.

On the other hand, we have REITs, which are obviously also real estate. But REITs have a lot more governance, a lot more regulation. They have boards, audit committees, and whatnot, because essentially, they're SEC-regulated. So they're fully utilizing what they can in terms of efficiencies. Yeah. That's it for me. Alonzo, we'll kick it back to you.

Alonzo Mitchell: All right. Thanks, Mark. And that brings us to our Q&A section. Kate?

Katharina Casey: Thanks, Alonzo. So I saw some questions come through, so I'm going to answer some of them. I think one question was, "Do construction activities qualify for material participation?" So construction activities is one of our real property trades or businesses. So yes, that's one of those 11 activities that go into that. "What happens if you have prior passive activity loss carryovers and then you become a real estate professional?" So yes, they are still there. They're still going to be your passive activity loss carryforwards.

You do want to keep in mind that if you need to meet the material participation tests and you want to aggregate your rental real estate activities together, they are still going to be passive activity losses, but you won't be able to free them up when you dispose of, say, one of those activities. You would have to get rid of substantially all of your rental activities in order to free up that passive activity loss. So just be aware of that if you're looking to aggregate and you have significant passive activity loss carryforwards.

One of the questions came through, "What if you had a taxpayer that definitely qualified as a real estate professional 10 years ago, 20 years ago, and now they could be going through something, some sicknesses, or times have changed of what they're doing, they delegated a lot out?" That's exactly why we're having this presentation, because we want you to think about that. Come to us. Come to your tax providers and talk about what changes are happening, because you might have qualified in the past, and maybe looking at what activity you're doing now, you wouldn't qualify in this year or in a year going forward. Yeah. I think that's all I have for right now. So, Alonzo, I'll put it back to you.

Alonzo Mitchell: All right. Mark and Alyssa, were there any questions that you saw at the bottom?

Alyssa Dolinshek: Yup. I can hop in and answer. One of them came through. The question was, "Why under an extinguishment would we capitalize and amortize fees that are paid to third parties?" And in the case of an extinguishment, it's viewed that you're extinguishing the original loan and the now modification is a new loan. So it's almost old loan is gone, new loan is obtained, and that's why the fees that you're paying to the third party are capitalized and amortized then over your new loan that you have. That's all on my end.

Alonzo Mitchell: All right. And Mark, I don't know if you had an opportunity to see if any of the questions relate to your section. If you do, you can answer it at this time. But if not, I do want to thank everyone for coming to today's webinar. If we do find a question that's in the text box that we did not respond to, we will respond via email. Thank you, guys.

^{Transcribed by Rev.com}