US builders seek refunds

Can struggling US home builders turn the tax collector into Robin Hood? After Lennar cut a deal on the last day of its fiscal year to sell illiquid land and secure a $300m tax refund, others are also looking to ditch depressed property assets and inject cash into their businesses.

It makes sense for builders to consider liquidity-boosting options while they are available. There is no shortage of investors looking to snap up land when the price is right. Home builders may end up selling at excessive discounts but their losses could be even worse if they wait and the housing slump gets worse. Property values are still sinking, and builders are expected to take further impairments on land and housing stock in the fourth quarter.

Some investors want to buy minority stakes in homebuilders or, for the worst hit, step in as lenders of last resort. But before they yield to vultures, builders are weighing deals among themselves that could win valuable tax refunds. By swapping plots of land this fiscal year, they could book losses on inventory to offset profits generated back in 2005, before the market turned down.

Such deals would accelerate tax benefits by yielding refunds in cash, rather than as credits against future profits. Given homebuilders’ funding requirements and the time value of money, that makes a lot of sense. US savings and loan companies swapped beaten-down mortgage portfolios in the 1970s and 1980s. The method could also, arguably, be used today by financial institutions burdened with troubled mortgage portfolios.

“Carry-backs” on net operating losses are valid for only two years. But during the economic downturn in 2002, President George W. Bush temporarily lengthened that window. As the government tries to limit the fallout from the housing slump, homebuilders may consider pushing for him to do it again.