Tax-Driven Deal Structuring

Glossary

Depreciation (as a timing lever)

The deduction of an asset's cost against taxable income over time. Because the schedule can often be accelerated for shorter-lived components, depreciation pulls tax benefits forward in time; it defers tax rather than forgiving it, and a benefit received now is worth more than the same benefit later.

Distribution requirement

The rule that a qualifying real estate investment trust must pay out most of its taxable income to shareholders each year. It is the price of avoiding entity-level tax and doubles as a discipline, since the trust must return to capital markets rather than hoard retained earnings to fund growth.

Funds from operations

A real-estate performance measure that starts from net income, adds back non-cash real-estate depreciation, and removes gains and losses on property sales, giving a clearer view of recurring cash-generating capacity than net income, which is distorted by large depreciation charges.

Interest tax shield

The reduction in tax that results because interest on debt has historically been deductible against taxable income while returns to equity are not. It lowers the effective cost of borrowing but is increasingly capped by rules limiting interest deductibility to a fraction of earnings.

Like-kind exchange

A long-standing real-property tax structure that lets an owner defer the gain on a sale by rolling the proceeds into a qualifying replacement property within strict timing and identification rules. It defers rather than forgives tax and applies to real property such as buildings and land, not to servers or other personal property.

Project finance

A financing structure in which debt is raised against a specific asset and its contracted cash flows, usually within a dedicated, ring-fenced entity, rather than against the sponsor's broad balance sheet. Its stable contracted income can support more borrowing and concentrates interest deductions against the asset's own income.

Real estate investment trust

A legal entity that owns income-producing real estate and largely escapes entity-level income tax by deducting the dividends it pays and distributing most of its taxable income to shareholders, who are then taxed once on those dividends. It must satisfy income, asset, and ownership tests to keep this status.

Sale-leaseback

A transaction in which an operator sells its real estate to a landlord and simultaneously leases it back under a long-term lease, continuing to run the facility unchanged. It converts a depreciation-and-interest tax shield into deductible rent and raises capital, in exchange for surrendering ownership and future appreciation.