If your business requires real estate to operate or holds property under its business name, it might be time to reconsider this approach. Separating business operations from real estate ownership offers several long-term benefits, including tax savings, liability protection, and enhanced estate planning options. This strategy could be a smart move for business owners looking to maximize their financial advantages.
Tax Benefits of Separating Real Estate from Your Business
For businesses structured as C corporations, real estate is often treated like any other business asset such as equipment or inventory. Expenses related to owning these assets are typically deductible, appearing as ordinary business expenses on income statements. However, issues arise when it comes to selling the real estate. In a C corporation, the profits from the sale of property are subject to double taxation—once at the corporate level and again when distributions are made to individual shareholders.
By transferring ownership of the real estate to a pass-through entity such as an LLC or an LLP, you can avoid double taxation. With this setup, profits from a real estate sale are taxed only at the individual level, helping you retain more of your earnings and reducing your overall tax burden.
Asset Protection and Liability Shield
Separating real estate ownership from the business can also safeguard your assets. If your business faces a lawsuit or creditors seek compensation, they could potentially target all assets, including real estate owned by the business. However, if the real estate is held under a separate legal entity, it becomes much harder for plaintiffs or creditors to seize that property.
This separation can also protect you during bankruptcy proceedings. Generally, creditors cannot recover real estate held by a separate entity unless the property was used as collateral for business loans. This makes separating real estate an excellent way to shield valuable assets from legal risks.
Estate Planning Advantages
Keeping real estate separate from the business can provide more flexibility in estate planning. For instance, if you own a family business and not all of your heirs are interested in managing the company, you have the option to pass the business to one heir and the real estate to another. This separation of assets allows for smoother inheritance and distribution of wealth among family members.
How to Separate Real Estate from Your Business
If you’re ready to explore this strategy, you can transfer ownership of the business property to a different entity and lease it back to the company. One option is for the business owner to purchase the real estate from the business, holding the title under their own name. However, this approach could expose the owner to liabilities, putting their personal assets at risk.
A better alternative is to transfer the property to a separate legal entity, typically an LLC or LLP, specifically formed to hold real estate. LLCs are easier to set up, requiring just one member, while LLPs require at least two partners and are not permitted in every state. An LLC, with its pass-through taxation structure, allows any real estate expenses to be deducted on your individual tax return, offsetting rental income from leasing the property to the business.
Risks and Considerations
While separating your business from its real estate offers many advantages, it may not be the best strategy for every situation. It’s important to assess the potential costs, capital gains taxes, and the risks of transferring liabilities. In some cases, the liabilities associated with the property could still pose risks to the business, especially if an incident like a client injury occurs on-site, leading to a lawsuit.
Take the Next Step
Deciding whether to separate your business from its real estate can be complex. The best approach depends on your specific business needs, tax considerations, and long-term financial goals. Consulting with tax and legal professionals can help you determine the most effective strategy for minimizing transfer costs, reducing taxes, and protecting your assets. By separating your business from its real estate, you can unlock significant tax benefits, protect your assets, and enhance your estate planning. For expert guidance tailored to your unique situation, contact us today to learn how we can help you maximize these advantages and secure your financial future.
Q&As:
How do taxes affect the sale of real estate owned by a business?
If a C corporation owns real estate, the profits from its sale are taxed twice: first at the corporate level and then at the individual level when profits are distributed. This double taxation can be avoided by transferring the real estate to a pass-through entity, where the sale is taxed only at the individual level.
How can separating real estate from a business safeguard assets?
By keeping real estate ownership separate from the business, you protect the property from creditors and lawsuits targeting the business. In the event of a lawsuit or bankruptcy, property owned by a separate entity is generally shielded unless it was used as collateral for business debts.
What are the estate planning benefits of separating real estate from a business?
Separating real estate from a business provides flexibility in estate planning, especially in family-owned businesses. If not all heirs are interested in running the business, you can distribute the real estate to one family member and the business to another, offering more balanced asset distribution.
What are the considerations when handling a real estate transfer from a business?
When transferring real estate ownership, an LLC or LLP is often used to hold the property. An LLC is typically easier to establish and offers liability protection. The business owner could also personally purchase the real estate, but this carries the risk of assuming property-related liabilities, which could impact the business if lawsuits arise.
