Real Estate Group Newsletter – Winter 2024
Alexandra K. Isdell, Kathy Z. Jeziorski

AI Comes to Real Estate: What Should You Expect?

Alexandra Isdell, CPA, MACC

After decades of being regarded as a fun sci-fi trope, artificial intelligence (AI) has come to the forefront across numerous industries, including real estate. As owners, operators, developers, syndicators, brokers and management companies have seen the technology take hold, they have begun to wonder about the consequences. Not surprisingly, the possibilities include both pros and cons.

AI in a Nutshell

The term AI generally refers to the use of computers and data to perform complex tasks typically thought of as requiring human intelligence, such as image perception, voice recognition, language translation, decision making and problem solving. Critically, AI “learns” from experience and additional data, becoming better at its tasks over time.

AI is a broad term. Among other things, it encompasses machine learning, natural language processing, robotic process automation, predictive analytics and computer vision. Another form of AI that has garnered much attention as of late is generative AI, a subset that generates content, including text, images and designs. ChatGPT is one well-known noteworthy example of generative AI.

A Wide Array of Advantages For the Real Estate Industry

AI could have a far-reaching impact on the real estate industry, from making the listing and search processes easier through automation to improving due diligence. For example, AI can:

Guide Investment Decisions
AI excels at the data aggregation essential to make profitable real estate investments. It can quickly pull relevant information from leases, loan documents, appraisals and other sources. It easily crunches mountains of data on factors like crime rates, sales and development trends, public transportation, schools, demographics and economic indicators. This helps to identify suitable investment opportunities, predict returns and determine the optimal times and prices at which to buy or sell.

Streamline and Expedite Transactions
Real estate transactions comprise numerous processes and procedures that are ripe for automation or other types of AI. For example, AI can apply data to produce more objective and accurate property valuations. It also can greatly reduce the kinds of human error that frequently crop up due to manual inputs. Where human input is irreplaceable by automation, AI can review documents for common errors and inconsistencies that may slow or otherwise upend transactions.

Enhance Property Management
Predictive analytics is already improving facility management, allowing for more cost-efficient management of climate control, lighting and other cost centers. It also can be used to screen tenant applicants, going beyond limited metrics like credit score and using data drawn from sources such as online purchasing behavior and social media (lenders can use similar data to evaluate mortgage applicants). Routine tasks can also be automated — for example, chatbots make it affordable to provide 24/7 customer support, thereby boosting tenant satisfaction. The tracking of applications and lease agreements can be automated, as well.

Related Read: Using Data Analytics to Gain a Competitive Edge and Boost Tenant Satisfaction

Potential Pitfalls

That said, AI is not all upside for players in the real estate industry. On the other side of the ledger lie some downsides, including:

High Initial Costs
For all the hype, AI is still in its relatively early stages, so the prices remain high. Users need to consider the costs to both acquire and implement the necessary hardware and software. This includes taking measures to combat the inherent cyber security risks when collecting and using client data.

Inaccurate Output
AI learns over time, meaning inaccurate results are likely during a particular tool’s infancy, as evidenced by some well-publicized missteps (for example, legal briefs citing cases that did not exist). It is worth remembering, too, that predictions are just that — they are not guarantees, whether they come from human or AI sources.

The Lack of Human Touch
Overreliance on AI can curb the vital creativity and critical thinking that have long fueled the real estate industry. Moreover, for all its strengths, AI does not have a human understanding of the role of factors like emotions, ethics and common sense.

Look Before You Leap

AI is bound to bring significant change to your business, but not every development is worth latching onto. We can help you determine which AI investments are worth pursuing for your circumstances.

For more information, please contact Alexandra Isdell. Visit ORBA.com to learn more about our Real Estate Group.

Converting Your Vacation Home to Your Primary Residence: What are the Tax Considerations?

Kathy Jeziorski, CPA

Your family’s vacation home has brought you – and the occasional renter – a wealth of seasonal memories, but now you want to move there permanently. Before you do so, you should consider several tax implications.

Rental or a Residence?

One of the most important issues is how the IRS characterizes the second home. If the home is a rental, it could affect your tax liability when you later sell it.

Generally, a vacation home is considered a residence, rather than a rental or investment property, if you use it for personal purposes during the tax year for more than the greater of:

  1. 14 days; or
  2. 10% of the total days you rent it to others at a fair rental price.

For example, if you occupy your vacation home 30 days of the year, it is treated as a residence unless you rent it to others at a fair rental value for 300 or more days during the year (Note: If the vacation home is occupied by your close family members or certain others who pay less than fair market rent, those days count as personal use days).

Gains Exclusion Rules

Your earlier use of the second home, which is now your primary residence, could have an impact on your ability to leverage the principal residence exclusion when you subsequently sell the home.

When you sell your principal residence, the IRS allows you to exclude up to $250,000 in capital gains from the sale (or $500,000 for married couples filing jointly). You can take advantage of the exclusion every two years.

To benefit from the exclusion, though, you must have lived in the home as your primary residence for at least two out of the five years preceding the sale (the two years do not need to have been consecutive). If you end up selling the home before satisfying this requirement, you will not be allowed to exclude any gains from taxation. Moreover, even if you meet the two-year requirement, the exclusion will be allocated based on the periods of “nonqualified use” over the years of your ownership.

For example, say you sell the home after living in it for two years but owning it for seven. The first five years – whether the home was a rental or a vacation residence – are deemed nonqualified use. Instead of benefiting from the full exemption, you will be entitled to only 2/7ths of the applicable exclusion amount (Note: The allocation requirement does not apply to nonqualified use before 2009).

The tax code provides, however, that a nonqualified use can occur only before the home was used as your primary residence. So, if you change your mind about living in the home after logging two years there, move out and then sell within three years, you will be entitled to the full exclusion on your gains.

The Role of Depreciation

Your tax liability upon the sale of the home could be even larger if it was a rental property for tax purposes before you made it your primary residence. That is because you qualified for deductions for rental-related expenses, including depreciation.

Depreciation deductions reduce your tax basis in the home, which in turn increases your gain at sale. But the IRS does not permit you to apply the primary residence exclusion to the part of your gain equal to any depreciation deduction allowed (that is, actually deducted) or allowable (legally expected to be deducted) for periods after May 6, 1997.

Bear in mind that you may be required to recapture, or pay back, some or all of the depreciation deduction you were entitled to claim on the home when it was a rental. Recaptured depreciation must be included as ordinary income on your federal income tax return. While the amount is included as ordinary income, it generally is taxed at a maximum rate of 25%.

Related Read: Turning a Vacation Home Into a Tax Benefit

Look Before You Leap

Converting a vacation or rental home to a personal residence raises numerous complex tax issues. Consult with your CPA early in the process to help ensure the best results.

For more information, please contact Kathy Jeziorski. Visit ORBA.com to learn more about our Real Estate Group.

Forward Thinking