Print
Email
Print Edition Stories
Friday, June 12, 2009
Inside Real Estate
The time may be right to purchase some business real estate
MHT's Galen Moore: New 'hyperlocal' web trend
MHT's Galen Moore: Two differing web-based news business models
Interactive map of Bedford's Crosby Drive tech hub
Many business owners who have been leasing their current business property are now either considering whether to purchase commercial real estate due to the recent declines in value.
Perhaps you have performed your cash flow projections and feel it is finally better for you to own property. The next decision needs to be carefully thought through; that is, the ownership structure for the purchase. Should your company purchase the real estate? Should you set up a separate limited liability company or limited partnership to hold the real estate assets?
There can be consequences when a business’s real estate is included in its general assets. For example, your business could be liable for injuries suffered on the property, or liabilities encountered by the corporation could affect your ownership of the property.
By holding real estate in a separate entity, you will reap some tax advantages and be able to pursue more real estate ownership options without affecting your core business.
Many businesses operate as C corporations so they can buy and hold real estate just as they do equipment, inventory and other assets. The expenses of owning the property are treated as ordinary expenses on the company’s income statement. However, when the real estate is sold, any profit is subject to double taxation: first at the corporate level and then at the owner’s individual level. As a result, putting real estate in a C corporation can be a costly mistake.
If the real estate were held instead by the business owners, or in a pass-through entity, such as an LLC or limited partnership, and then leased to the corporation, the profit upon a sale of the property would be taxed only once — at the individual level.
Limit liability
The most straightforward and seemingly least expensive way for an owner to maximize the tax benefits is to buy the property outright. However, this could transfer liabilities related to the property directly to the owner, putting other assets — including the business itself — at risk.
So, it’s best to put real estate in its own limited liability entity. The LLC is most often the vehicle of choice for this, but limited partnerships can accomplish the same ends if there are multiple owners.
The disadvantage of a limited partnership, is that you may incur more expense by setting up two entities: the partnership and a corporation to serve as the general partner. As a result, the LLC is often the entity of choice. No matter which structure is used make sure all entities are adequately insured.
Separating real estate ownership from the business also creates options to meet the needs of multiple owners and for succession planning. Let’s say that a family business is passing from one generation to the next. One child is very interested in operating the business and another child is not. The one who is interested in owning the business may not have the means to finance the purchase of both the business and its real estate.
If the business and real estate are separated, it’s possible for one sibling to take over the business while another holds the real estate. In this case everyone can benefit.
Treating real estate like any other business asset can get you in trouble. Work with your advisors to create a plan of ownership that suits your situation and plans for the future.
Kevin Coveney is a CPA specializing in assurance services at Braver PC.
RSS Feeds
Comments
Please Login/Register to post comments.
No comments have been added or approved.