Home builders and real estate developers seeking potential tax benefits should consider land banking. The strategy can assist those working on large, multiphase projects where land is acquired well in advance of development and sold or developed over time. This article will explore how land banking may benefit developers and how early involvement from a CPA can help.
Benefits of a Land Banking Strategy
A land banking strategy is a long-term tax planning approach. Land is acquired and held in a separate land-holding entity, while a related development entity purchases land in phases as development begins.
Many developers acquire land and move quickly into development. While that approach may accelerate projects, it can also result in higher tax exposure when land sales are treated as ordinary income rather than capital gains.
Through land banking, selling land incrementally over time may allow the land-holding entity to qualify for long-term capital gains treatment, potentially reducing overall tax liability. The difference between capital gains and ordinary income tax treatment can be significant, especially over large, multiyear developments.
Land banking provides the land bank entity with flexibility. The entity has the option to sell the land in phases, contribute land to a joint venture, or exit entirely. Land banking offers developers a longer investment period that can potentially provide significant returns as the land is developed in phases while appreciating in value. The practice can unlock liquidity for developers by moving property to land bankers’ balance sheets, which may improve their creditworthiness.1
How to Structure a Land Banking Strategy
Land banking requires a meaningful holding period, limited early development activity, and structuring before acquisition or early in the project life cycle. The land bank is typically structured as a partnership entity with the development entity being structured as an S corporation.
Deal terms, legal structure, and tax treatment are important aspects of land banking arrangements. Transactions should align with the developer’s timing, capital needs, and risk tolerance.2
Developers often lose the benefit of this strategy by starting construction too quickly, restructuring too late, or failing to coordinate with tax advisors early.
Importance of Early CPA Involvement
Land banking is a day-zero decision. Early CPA involvement helps ensure the structure aligns with development timelines and tax requirements.
Timing, intent, activity, and contemporaneous documentation are very important for land banking. The strategy requires a long-term investment horizon for implementation.
A CPA can aid developers in avoiding costly mistakes and protect their equity. Waiting until after a sale may remove most tax-saving options.3
How Forvis Mazars Can Help
If you are planning a large development, the way land is held and sold can have lasting tax consequences. If implemented early, the right structure can preserve value over the life of the project.
If you wish to learn more about how the tax strategy of land banking may benefit you, please reach out to a professional at Forvis Mazars.