Why Real Estate Transactions Need Both Legal and Tax Counsel
Every significant real estate transaction involves both legal and tax dimensions that are deeply interconnected and that are frequently handled by separate professionals who do not fully coordinate. The attorney drafts the purchase agreement without modeling the tax consequences of the deal structure. The CPA advises on depreciation without reviewing the lease's expense allocation provisions. The result is a transaction that is legally sound and tax-suboptimal, or one in which the legal structure inadvertently creates a tax problem neither advisor anticipated.
At Montgomery Legal, real estate transactions are handled by an attorney who is also a CPA. That means the legal documents and the tax analysis are developed together. When we review a commercial lease, we are reading it simultaneously for legal enforceability and for the expense obligations it creates. When we structure a purchase, we are evaluating the purchase agreement terms alongside the depreciation profile, the financing structure, and the applicable tax elections. The two disciplines inform each other, and nothing falls between them.
We focus on commercial and investment real estate the transactions where the legal complexity and tax stakes are high enough that the integration genuinely matters. Business owners purchasing their facilities, investors acquiring rental properties, operators structuring sale-leaseback arrangements, and sellers navigating the capital gains consequences of a disposition are the clients we serve most effectively.
What we handle
Purchase and Sale Agreements
Drafting and reviewing commercial real estate purchase agreements, letters of intent, due diligence coordination, and closing documentation for buyers and sellers of commercial, industrial, and investment properties.
Commercial Lease Drafting and Review
Drafting and reviewing commercial leases office, retail, industrial, and mixed-use with attention to rent escalation, CAM provisions, tenant improvement allowances, assignment rights, and renewal options.
Seller-Financed Transactions
Structuring and documenting seller-financed real estate deals promissory notes, deeds of trust, installment sale agreements, wraparound mortgages, and due-on-sale analysis with integrated installment sale tax planning.
§1031 Like-Kind Exchanges
Structuring and documenting §1031 exchanges forward exchanges, reverse exchanges, improvement exchanges with coordination of qualified intermediary relationships and replacement property identification strategy.
Entity Structuring for Real Estate
Selecting and forming the optimal ownership structure for real property LLC, series LLC, LP, or trust accounting for liability protection, financing constraints, management authority, and the tax treatment of income, depreciation, and eventual disposition.
Real Estate Tax Strategy
Depreciation planning, cost segregation coordination, passive activity analysis, real estate professional status, opportunity zone investments, and disposition planning integrated with the overall business and estate tax picture.
Sale-Leaseback Transactions
Structuring sale-leaseback arrangements for business owners who want to monetize owned real estate while retaining operational use addressing the tax treatment of the sale, the lease terms, and the ongoing deductibility of rent payments.
Real Estate Disputes
Landlord-tenant disputes, breach of purchase agreements, earnest money disputes, boundary and title issues, and disputes over CAM reconciliations with the financial analysis and legal strategy handled together.
Commercial Real Estate Purchase and Sale
Commercial real estate transactions are among the most significant financial commitments a business or investor makes and they involve legal and financial complexity that residential transactions simply do not. The purchase agreement, title review, due diligence process, financing documents, and closing mechanics each require attention from someone who understands both the legal obligations being created and the financial consequences of the terms being agreed to.
The commercial real estate purchase agreement is the foundational document of the transaction it defines the price, the conditions, the allocation of risk between buyer and seller, and the legal obligations of both parties through closing. Unlike a residential contract on a standard TREC form, commercial agreements are negotiated instruments where the terms are genuinely open to modification, and where the language matters in ways that surface years later when disputes arise.
We draft and review purchase agreements for all types of commercial property office buildings, retail centers, industrial facilities, vacant land, and multi-family investment properties. The review examines representations and warranties, the due diligence period and what it does and does not cover, earnest money conditions and forfeiture triggers, closing conditions, assignment rights, and what happens when conditions are not met. From a tax perspective, we also review how the purchase price is structured relative to the assets being acquired and what elections are available at closing.
- Purchase price and earnest money structure
- Due diligence period scope and termination rights
- Representations and warranties on title, condition, and tenancy
- Prorations taxes, rents, CAM deposits
- Assignment and 1031 accommodation provisions
- Seller's obligations title cure, environmental disclosure
- Default remedies liquidated damages vs. specific performance
- Closing costs allocation and adjustment
Due diligence what buyers should verify before closing
- Title review: The title commitment identifies all recorded encumbrances liens, easements, deed restrictions, and boundary issues that will survive the sale. Exceptions that the buyer accepts become permanent limitations on the property. We review the title commitment and advise on which exceptions are acceptable, which should be removed before closing, and which require title insurance endorsements.
- Lease review: For income-producing properties, existing leases are the economic heart of the acquisition. We review all leases for rent, term, renewal options, exclusivity provisions, co-tenancy clauses, tenant improvement obligations, and any side letters that modify the written lease. Assumptions about occupancy or rent that are not reflected in the actual lease documents are a common source of buyer disappointment post-closing.
- Environmental diligence: Phase I and Phase II environmental reports identify recognized environmental conditions that could result in remediation liability. We advise on the legal significance of environmental findings and when indemnification provisions, price reductions, or deal termination are the appropriate responses.
- Survey and zoning: The survey confirms property boundaries and identifies physical encroachments or easements not reflected in the title commitment. Zoning review confirms that the buyer's intended use is permitted before the purchase price is paid.
- Financial and operating review: For income-producing properties, we review rent rolls, operating statements, property tax assessments, and CAM reconciliations to verify that the reported income and expense profile reflects actual historical operations not a pro forma constructed to support the asking price.
Commercial Lease Agreements
A commercial lease is a long-term financial commitment often five to ten years for established businesses with obligations that run in both directions and can be significantly more complex than they appear. Many business owners sign commercial leases without legal review, on the assumption that the landlord's form is standard. Commercial landlord forms are standard in the sense that they are commonly used but they are drafted to protect the landlord, and the provisions that matter most for the tenant are the ones that are negotiated, not accepted.
Commercial lease types and their financial implications
| Lease Type | Tenant Pays | Landlord Pays | Tenant Risk | Typical Use |
|---|---|---|---|---|
| Triple Net (NNN) | Base rent + property taxes + insurance + maintenance | Structural repairs (sometimes) | High expense variability | Retail, freestanding buildings, net-lease investment properties |
| Double Net (NN) | Base rent + property taxes + insurance | Maintenance and repairs | Moderate | Office and some retail |
| Modified Gross | Base rent + negotiated share of operating expenses | Remaining operating expenses | Moderate shared | Office buildings, flexible arrangements |
| Full Service / Gross | Base rent only (with expense stop) | All operating expenses up to base year | Lower but expense stop matters | Multi-tenant office buildings |
| Percentage Lease | Base rent + percentage of gross sales | Typically operating expenses | Variable with sales performance | Retail, restaurants, anchor tenants |
Critical lease provisions what to negotiate before signing
Rent Escalation and CPI Adjustments
How base rent increases over the lease term fixed percentage escalations, CPI-tied adjustments, or market rent resets at renewal. Uncapped CPI adjustments in inflationary environments can produce rent increases far larger than anticipated. Fixed escalations provide predictability. The right structure depends on current market conditions and the tenant's business model.
Common Area Maintenance Provisions
CAM charges the tenant's share of property operating expenses are the most litigated area of commercial lease disputes. The lease should clearly define what expenses are included in CAM, whether management fees and administrative charges are recoverable, the cap on year-over-year CAM increases, and the tenant's right to audit CAM reconciliations. CAM provisions in landlord forms routinely overstate recoverable expenses.
TI Allowance and Construction Provisions
The tenant improvement allowance the landlord's contribution to the cost of building out the space is one of the most significant economic terms in a lease. Who controls the construction, what the allowance covers, when it is funded, and what happens to improvements at the end of the term are all negotiable. The tax treatment of TI allowances depends on how they are structured in the lease.
Assignment, Subletting, and Co-Tenancy Rights
The ability to assign the lease to a buyer of the business, sublet unused space, or exit the lease if an anchor tenant leaves these provisions define the tenant's flexibility over the lease term. Landlord forms typically restrict assignment to situations requiring landlord consent, which can become a deal-stopper in a business sale. We negotiate assignment provisions that protect the tenant's ability to transfer the lease as part of a business transaction.
Renewal Options and Expansion Rights
Renewal option terms how many renewals, at what rent, with what notice requirements determine whether the tenant has a meaningful right to remain in the space or is at the landlord's mercy at the end of the initial term. The rent for renewal periods should be defined (or defined by a clear mechanism), not left to negotiation at a time when the tenant has no leverage.
Early Termination and Default Provisions
Early termination rights often tied to a termination fee provide the tenant with an exit if business conditions change. Landlord default provisions define what happens when the landlord fails to maintain the property or deliver the space. Personal guarantee scope whether the business owner is personally liable for lease obligations and for how long should be negotiated at the outset, not after the lease is signed.
Seller-Financed Real Estate Transactions
Seller financing where the seller of real property accepts a promissory note rather than cash at closing is used in real estate transactions for a range of reasons: a buyer who cannot qualify for conventional financing, a seller who wants to spread the taxable gain across multiple years, a transaction that would not otherwise close due to a financing gap, or parties who prefer the flexibility of a directly negotiated credit arrangement over a bank loan.
Seller-financed transactions require careful legal documentation and integrated tax planning. The legal documents the promissory note, the deed of trust securing repayment, and the purchase agreement terms governing default and remedies determine what happens if the buyer stops paying. The tax structure the installment sale election, the interest rate, and the allocation of payments between principal, interest, and original issue discount determines when and how the gain is recognized and taxed.
A seller-financed real estate transaction is, at its core, a combination of a real estate sale and a private loan and both sides need to be documented and structured with care. The promissory note sets the interest rate, the payment schedule, the balloon payment terms, and the default and acceleration provisions. The deed of trust gives the seller a lien on the property to secure repayment. Together, these documents define the seller's remedies if the buyer defaults and Texas law provides a specific nonjudicial foreclosure process under the deed of trust that is substantially faster than judicial foreclosure.
From a tax perspective, the installment sale election under §453 allows the seller to recognize gain pro-rata as payments are received deferring recognition beyond the year of sale and potentially avoiding the stacking of gain into higher tax brackets. The interest component of each payment is ordinary income. The principal repayment portion is a return of basis plus recognized gain. The allocation must be correctly calculated and reported on each year's return.
Interest rate requirements also matter: the note must carry at least the Applicable Federal Rate published monthly by the IRS, or the IRS will impute interest recharacterizing a portion of the stated principal payments as interest income, regardless of what the note says. We advise on the current AFR and structure notes to avoid imputed interest complications.
- Promissory note rate, amortization, balloon, default
- Deed of trust securing the note
- Purchase agreement provisions governing seller financing
- Loan modification and forbearance agreements
- Wraparound mortgage documentation
- Land contract / contract for deed (where appropriate)
- §453 installment sale election and gross profit ratio
- Applicable Federal Rate compliance
- Depreciation recapture recognition rules
- Related-party installment sale restrictions
- Estate planning implications of installment notes
§1031 Like-Kind Exchanges
Section 1031 of the Internal Revenue Code allows an investor to sell one investment property and defer the capital gain potentially indefinitely by reinvesting the proceeds in a like-kind replacement property. For real estate investors with significant appreciated holdings, the §1031 exchange is one of the most powerful tax deferral tools in the Code. Used systematically over a lifetime of investing, it allows capital to compound tax-deferred until death, when the step-up in basis at the investor's passing eliminates the deferred gain entirely.
The exchange is not complicated in concept, but it is strict in execution. The rules governing timing, identification, qualification of the replacement property, and the role of the qualified intermediary are technical and unforgiving a missed deadline or a disqualifying action by the exchanger means the entire gain is recognized in the year of sale, as if no exchange had been attempted.
A forward exchange is the standard structure: the relinquished property is sold, the proceeds are held by a qualified intermediary (not the taxpayer), and the replacement property is acquired within the statutory window. The exchanger must not have actual or constructive receipt of the proceeds hence the qualified intermediary's essential role.
A reverse exchange allows the taxpayer to acquire the replacement property before selling the relinquished property useful when an attractive replacement property is available but the relinquished property has not yet sold. A reverse exchange is structured through an Exchange Accommodation Titleholder (EAT) and is governed by IRS Revenue Procedure 2000-37. The costs and complexity are higher than a forward exchange, but the structure provides significant flexibility.
An improvement exchange allows the taxpayer to use exchange proceeds to fund improvements to the replacement property before taking title effectively allowing the exchange to include construction costs as part of the qualifying reinvestment. Also requires an EAT and careful compliance with the 180-day window.
- 45 days from closing to identify replacement properties (3-property rule or 200% rule)
- 180 days from closing to acquire replacement property
- Exchanger cannot receive proceeds qualified intermediary required
- Boot received (cash or debt relief) is taxable in the year of exchange
- Depreciation recapture is not deferred recognized in year of exchange
- Exchange agreement must be in place before or at closing of relinquished property
- Both properties must be held for investment or productive use in a trade or business
The §1031 exchange agreement must be in place before the relinquished property closes. This is the most common error in failed exchanges the seller decides to do an exchange after the closing has already occurred, at which point it is too late. The exchange agreement with the qualified intermediary must be executed, and the assignment of the relinquished property contract to the intermediary must be completed, before funds change hands. We advise on exchange planning in advance of closing, not after.
Entity Structuring for Real Property
How real property is owned shapes everything downstream liability exposure, financing options, management authority, the tax treatment of income and depreciation, how property transfers on death, and what happens in a sale. Most real estate investors do not think carefully about entity structure when they acquire their first property; the issues become apparent when something goes wrong, or when the portfolio has grown to the point where restructuring is expensive.
Single-property LLC the standard for a reason, but not without trade-offs
A single-member LLC provides liability protection and pass-through taxation without the complexity of multiple-member governance. It is the appropriate structure for most individual investment properties. But the LLC does not eliminate all risk: lenders often require personal guarantees, the liability shield can be challenged if the LLC is not properly maintained, and Texas franchise tax obligations apply to LLCs regardless of size. We form and maintain LLCs that are properly documented and operationally credible.
Portfolio structure separate entities, umbrella LLCs, and series LLCs
Investors with multiple properties face a structural choice: one LLC per property (maximum separation, maximum administrative burden), a single LLC for all properties (minimal burden, cross-collateralization risk), or a Texas series LLC (legal separation within a single filing). The right answer depends on the risk profile of each property, the financing structure, and the investor's tolerance for administrative complexity. We design portfolio structures that balance protection with manageability.
Business real estate separating the operating company from the property
Business owners who own the real estate their company occupies should almost always hold the property in a separate entity from the operating business. The property LLC leases to the operating company, creating a rental income stream that is taxed at favorable rates, protecting the real estate from the operating company's creditors, and positioning each asset for independent disposition. The intercompany lease must be properly structured and documented at market terms to withstand IRS scrutiny.
Co-investment structures LLCs, partnerships, and investor agreements
When two or more investors acquire property together, the governance documents operating agreement or partnership agreement determine how decisions are made, how income and losses are allocated, what happens when one investor wants to exit, and how disputes are resolved. We draft co-investment agreements that address these questions clearly before disputes arise rather than after, including buy-sell provisions, forced sale mechanisms, and transfer restrictions.
Real estate and the estate plan coordination with trusts and gifting strategies
Real property is often the largest asset in an estate, and how it is owned determines how it transfers at death. Property held individually passes through the estate and benefits from the step-up in basis. Property held in a revocable trust avoids probate but remains in the taxable estate. Property gifted during life transfers the donor's basis without step-up. We coordinate real estate ownership structure with the overall estate plan to produce the optimal outcome across the life of the asset.
Real Estate Tax Planning
Real estate is one of the most tax-advantaged asset classes in the Internal Revenue Code depreciation generates non-cash deductions that shelter rental income, §1031 exchanges defer gain indefinitely, and the step-up in basis at death eliminates deferred gain entirely. But these benefits are not automatic they require deliberate planning, correct elections, and ongoing management of the tax position throughout the holding period.
Depreciation and cost segregation
Residential real property is depreciated over 27.5 years; commercial real property over 39 years. But within every commercial property, there are components personal property, land improvements, and qualified improvement property that are eligible for shorter depreciation lives of 5, 7, or 15 years. A cost segregation study reclassifies these components, accelerating depreciation deductions and generating large first-year benefits when combined with bonus depreciation under §168(k).
On a $3 million commercial property, a cost segregation study typically identifies $400,000–$900,000 of components eligible for accelerated treatment generating $150,000–$350,000 of additional first-year deductions that directly reduce taxable income from the property and, for qualifying real estate professionals, from other income sources as well.
Passive activity rules and real estate professional status
Rental real estate losses are generally passive they can only offset passive income, not wages or business income. For investors whose rental properties generate net losses through depreciation, the passive activity limitation prevents those losses from being used against their ordinary income unless they qualify as real estate professionals under §469(c)(7).
To qualify as a real estate professional, the taxpayer must spend more than 750 hours per year in real property trades or businesses and more than half of their total working hours in those activities. If the qualification is met, rental losses become non-passive and can offset any income. For high-income taxpayers with significant rental depreciation, this status can produce six-figure annual tax savings but the qualification requires careful documentation of time spent.
Disposition planning
- §1031 exchange: Defer all capital gain by reinvesting in like-kind replacement property within the statutory window. Most powerful when the property is highly appreciated and the investor plans to continue investing in real estate.
- Installment sale: Spread gain recognition across multiple years by accepting seller financing. Reduces the marginal rate by preventing gain from stacking into the highest bracket in a single year. Requires careful documentation and AFR compliance.
- Charitable Remainder Trust (CRT): Contribute low-basis appreciated property to a CRT, which sells the property tax-free and provides an income stream to the donor along with a partial charitable deduction and removal of the asset from the taxable estate.
- Opportunity zone investment: Reinvest capital gain proceeds into a Qualified Opportunity Fund within 180 days of the sale to defer and potentially reduce the recognized gain, with gain on the opportunity zone investment itself excluded after a 10-year hold.
- Hold until death: The step-up in basis at death eliminates all deferred gain accumulated through prior §1031 exchanges and lifetime depreciation. For investors who do not need liquidity and can afford to hold, the step-up is the ultimate disposition strategy but estate tax planning must be integrated to ensure the estate tax cost does not exceed the income tax savings.
