Does your business rely on real estate for operations, or do you currently hold property in your business’s name? It may be time to reconsider this approach. Separating the ownership of your business and its real estate offers several long-term advantages, including tax benefits, asset protection, and estate planning options.
Impact of Taxes When Selling Real Estate
C corporations treat real estate like other assets, such as equipment or inventory. They deduct any related expenses on income statements in the year incurred, which can lower taxable income. However, selling real estate under a C corporation leads to double taxation—once at the corporate level and again at the individual level when profits are distributed to owners.
You can avoid double taxation by transferring the real estate to a pass-through entity. This structure ensures that the profit from a sale is taxed only at the individual level, simplifying the tax burden.
Protecting Your Assets
Separating real estate ownership also shields your property from claims made against the business. If a lawsuit results in liability, plaintiffs can target assets held by the business, including any real estate. By holding the property in a separate entity, you prevent it from being included in potential claims.
This protection extends to bankruptcy situations. Creditors cannot seize real estate held by another entity unless it has been used as collateral for business debts.
Estate Planning Flexibility
Dividing your business from its real estate opens up more estate planning options. If you operate a family business and not all heirs are interested in managing the company, separating the real estate provides another asset to divide. For instance, you could pass the business to one heir and the real estate to another, creating a more balanced distribution of assets.
Structuring the Transaction
If you decide to separate ownership, you can transfer the real estate to another entity and then lease it back to the business. One option is for the business owner to personally buy the property and hold the title. However, this move transfers any associated liabilities along with the property.
Moreover, any issues involving the property could also jeopardize the business. For example, if someone suffers an injury on the premises and sues, the property owner’s other assets, including business interests, could be at risk.
A more common approach is to transfer the real estate to a limited liability company (LLC) or a limited liability partnership (LLP). With these structures, any expenses related to the property pass through to your personal tax return, offsetting rental income.
LLCs are popular because they are simple to set up and can be formed with just one member. In contrast, LLPs require at least two partners and may not be available in every state. Some states restrict LLPs to specific industries and impose other limitations.
Proceed with Care
While separating your business from its real estate can offer significant benefits, it’s not always the best move. Whether it’s right for your business depends on your unique circumstances. Contact us for help determining how to minimize transfer costs and capital gains taxes while maximizing the potential advantages.
