If your business relies on real estate for its operations, or if your company holds property under its name, it may be worth exploring the advantages of separating the ownership of the property from the business itself. This separation can offer substantial tax benefits, asset protection, and estate planning flexibility, making it a strategic move for many business owners.
Tax Advantages on a Sale
For C corporations, real estate assets are treated similarly to equipment and inventory. Expenses related to these assets are usually deductible as ordinary business expenses in the year they’re incurred. However, if the business later sells the property, the profit is subject to double taxation — once at the corporate level and again at the individual level when profits are distributed to owners.
Separating real estate ownership from the business structure can help avoid this double taxation. By transferring real estate to a pass-through entity, only individual-level tax applies upon a sale, which can result in significant tax savings.
Protecting Assets from Liability
Separating real estate ownership from the business can also offer vital asset protection. If your business faces a lawsuit, creditors may have the right to pursue assets owned by the business, including any property it holds. By keeping real estate under a separate entity, you protect that property from potential claims against the business.
This separation is also advantageous in the event of bankruptcy. Creditors can generally only recover assets that the business directly owns or those pledged as collateral, leaving real estate in a separate entity out of reach.
Estate Planning Flexibility
For family-owned businesses, separating the real estate from the business can provide flexibility in estate planning. If some heirs are interested in managing the business while others are not, real estate ownership can be assigned to heirs who prefer a more passive role, allowing them to receive income from the property without being involved in daily business operations. This approach helps distribute assets fairly among family members.
Structuring the Transaction
If you decide to pursue this strategy, you may transfer ownership of the real estate to another party and lease it back to the business. This arrangement allows the company to operate as usual while keeping real estate ownership separate.
One option is for the business owner to buy the real estate and hold it personally. However, be aware that this approach may transfer liabilities related to the property to the owner. Additionally, liability associated with the property, such as a personal injury claim, could impact other assets, including the owner’s interest in the business.
A commonly recommended approach is to transfer ownership to a new legal entity, typically a limited liability company (LLC) or a limited liability partnership (LLP). An LLC, which requires only one member and is generally simpler to set up, is often used for this purpose. LLPs, though also effective, require at least two partners and may have restrictions depending on the state.
Proceed with Caution
Separating a business from its real estate isn’t always the best solution for every business owner. Each situation is unique, and the optimal approach depends on individual circumstances. Reach out to us for personalized guidance on minimizing transfer costs and capital gains taxes while maximizing potential benefits.
