The pandemic is having a crippling effect on state budgets, some of which were still climbing out of the Great Recession. States expect to lose billions of dollars of revenue over the next two years – some estimate up to $200 billion – due to the economic shutdown and dollars diverted for emergency COVID-19 expenses. Texas has seen a significant decline in revenues as cases spike. While the state collected 4.3% more in sales tax revenue from the retail sector in July than in the same period last year, receipts from other sectors show a sharp decline. While awaiting word of additional federal dollars in the next stimulus package, many states have become more vigilant about collecting revenue from other sources, including unclaimed property held by commercial real estate companies.
Overview: Unpaid Property Collections
State laws require corporations to determine on an annual basis whether they are retaining money that actually belongs to the state, and this includes unclaimed property. Unclaimed property refers to those assets or funds where the rightful owner either can’t be located or has left an account dormant, typically for more than five years. If the owner of the property is not determined after a dormancy period, the money goes to the state of the owner’s last known address. That state is then permitted to use these funds in a manner that benefits the state, such as covering budget deficits. In effect, the state can increase revenue without imposing a tax increase. The revenue can be significant—in some states, the unclaimed property can be one of their most significant sources of revenue.
Increased Scrutiny on Commercial Real Estate Companies and REITs
When states are experiencing revenue shortfalls, commercial real estate companies offer a significant source of funds. As a result, CRE companies can expect increased scrutiny in the form of audits and stricter enforcement. Since states are looking for tenant overpayments, their most likely targets are multifamily corporations, and asset management companies with portfolios of commercial real estate. Overpayment can occur when tenants move and their security deposit refund is left uncashed. REITs are another target—states examine their dividend payouts.
States Ease Thresholds for Recovering Unclaimed Property
States must advertise the unclaimed property they hold. A growing number are passing laws to ease this process so they can collect more unclaimed property. Since 2016, seven states have enacted total replacements to their unclaimed property statutes, with many more to follow. For example, some states are lowering the threshold for the items that need to be reported and raising the threshold for what needs to be advertised. By doing so, they will be able to raise more revenue.
How CRE Companies Can Mitigate Exposure
States and third-party auditors will continue to target commercial real estate companies for audits and enforcement. Audits are time-consuming and costly for your company, and no one wants to take on that burden. At the same time, there is often not enough compliance among the commercial real estate industry regarding unclaimed property, and some companies may have more than $1 million in uncollected unclaimed property. The first step is to be proactive in implementing voluntary compliance initiatives to uncover potential issues that the state could target.
While you will need to remit unclaimed property, your company could potentially reclaim unclaimed property—as long as you are compliant with state requirements. In fact, states return billions of dollars of unclaimed property each year. In 2014, Texas returned more than $200 million to owners of previously unclaimed property. The best way to avoid audits is to thoroughly understand the laws regarding unclaimed property, including dormancy periods and requirements for remitting money to the state. Considering that audit estimation methods are complex, it is best to work with your tax professionals.
New E-book Available: Tax-Savings Strategies for Real Estate Professionals
The U.S. tax code provides a wealth of tax-savings opportunities for real estate professionals who understand how to apply them to their maximum advantage. Yet millions of dollars are left untapped simply because real estate developers and investors are unaware that they qualify for favorable tax treatment. The real estate accountants at GPP outline the most beneficial strategies in a new e-book.
Having a knowledgeable tax accountant that understands these new and complicated tax rules could provide you with valuable savings. The accountants on Goldin Peiser & Peiser’s Real Estate and Construction Services Team can help ensure these new tax laws work for you. For more information, contact Eric Olsen at 214-635-2538.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.