Consider reassessing the current structure of your business if it depends on real estate for its functions or holds property under the business's ownership. Maintaining a clear distinction between your business and real estate ownership can yield significant benefits in terms of tax, liability, and estate planning.
Tax Implications of Property Sales.
When real estate is owned by a C corporation, it is treated similarly to other business assets, such as equipment and inventory. Related expenses are typically deductible in the year they are paid under IRC §162. However, in the event that the corporation sells the property, this transaction can lead to double taxation: first at the corporate level and then again at the individual level on distributions, as outlined in IRC §11 and IRC §301.
By transferring the property to a pass-through entity like an LLC, the proceeds from the sale can be distributed directly to the owners, circumventing double taxation and leading to a more straightforward tax outcome in accordance with IRC §701.
Asset Protection
Isolating your real estate from your main business can help safeguard important assets against possible claims. When legal issues arise for the business, properties owned by a distinct entity are usually not exposed to the same liabilities, providing an additional layer of asset protection under IRC §465. This segregation can also be beneficial in case of bankruptcy, as real estate owned outside the business is typically shielded from creditors—assuming it hasn’t been utilized as collateral.
Estate Planning Alternatives
Creating a divided ownership framework for your real estate and business can enhance your estate planning flexibility. In the case of family-run businesses, distinguishing between the two may create opportunities for transferring assets: one heir could receive the business operations, while another could inherit the real estate. This strategy may also assist with estate tax considerations, as outlined in IRC §2032A.
A more typical strategy involves transferring ownership to a distinct entity such as an LLC or LLP. LLCs tend to be simpler to establish, can have just one owner, and offer tax advantages for individual owners according to IRC §7701. Income from rentals and expenses related to the property will pass through to personal tax returns, providing further deductions and enhancing tax efficiency.
Structuring Real Estate Ownership Separately for Strategic Business Transactions
To separate real estate from a business, the business can transfer ownership of the property to an individual or a different entity, which would then lease the property back to the business. One straightforward approach is for the business owner to purchase the property and own it personally, though this may involve personal liability risks.
A more common strategy is to transfer ownership to a separate entity, such as an LLC or LLP. LLCs are usually simpler to establish, require only one owner, and offer tax benefits for individual owners under IRC §7701. Rental income and property-related expenses are reported on the owner's tax return, allowing for additional deductions and greater tax efficiency.
Reach out to JCox CPAs & Advisors, P.C. to determine the most effective strategies for minimizing transfer costs and capital gains taxes while maximizing other potential benefits.
