News & Events

Should Your Business Own Real Estate?

February 18, 2009

Many business owners own not only typical business assets, such as equipment, inventory and furnishings, but also the land on which the building and parking lot sit — and possibly other real estate as well. But there can be negative consequences when a business’s real estate is included in its general corporate assets.

For example, your business could be liable for injuries suffered on the property or, vice versa, legal liabilities encountered by the corporation could affect your ownership of the property. By holding real estate in a separate entity, you’ll reap some tax advantages and be able to pursue more real estate ownership options without affecting your core business.

Capturing tax savings

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 when a distribution is made. 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 owner(s) or in a pass-through entity, such as a limited liability company (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.

Limiting liability

The most straightforward and seemingly least expensive way for an owner to maximize 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, at risk. In essence, it would negate part of the rationale for organizing the business as a corporation in the first place.

So, truly, 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 a limited partnership can accomplish the same objective if there are multiple owners. The disadvantage of a limited partnership, however, is that you’ll incur more expense by setting up two entities: the partnership itself and typically a corporation to serve as the general partner.

As a result, the LLC has often become the entity of choice. No matter which structure is used, though, make sure all entities are adequately insured.

Staying flexible

Separating real estate ownership from the business also creates more options to meet the needs of multiple owners. Let’s say that a family business is passing from one generation to the next. One child is very interested in owning and operating the business but doesn’t have the means to finance the purchase of both the business and its real estate.

If the two are separated, it’s possible for one sibling to take over the business while other siblings hold the real estate. In this case everyone can benefit. The child who buys the business doesn’t have to share control with siblings, while other siblings can still reap benefits as property owners.

Examine your options

Treating real estate like any other business asset can get you in trouble, so work with your advisors to create a plan of ownership that best suits your individual situation.

« Back to News | Back to the top

---

The content in our Web site's news articles is intended to review and explain business issues, trends and ideas to business owners, executives and individuals. We hope this article, publication and web site will help you deal more effectively with a variety of management, tax and business planning issues; it is not intended, however, to provide accounting, legal or other professional advice. For more information about the ideas presented in this news article, please call our offices at (314) 962-0300.