SEE ALSO >> Tax Planning

There are many reasons why you might not want to combine real estate and other assets in a single entity. For example, your business could be liable for injuries suffered on the property, or legal liabilities encountered by the corporation could affect your ownership of the property. But there are plenty of reasons for holding real estate in a separate entity, including tax savings, limited liability and flexibility.

How to avoid costly mistakes

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.

How to maximize tax benefits

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 — at risk. In essence, it would negate part of the rationale for organizing the business as a corporation in the first place.

So it’s generally best to hold 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. No matter which structure is used, though, make sure all entities are adequately insured.

How to stay 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 the other siblings, yet they can still reap benefits as property owners.

The bottom line

If you treat real estate like any other business asset, you might find yourself in a world of trouble. For additional information please contact us 302.225.0600 or click here to contact us.