If you are one of those people who chooses to hold real estate and other assets separately, then you are doing the smart thing. The general reasons why people do so is because they fear liabilities that could affect property ownership or liabilities for injuries suffered on the property. However, the valid motive why anyone should choose not to combine them into a single entity is to benefit from tax reasons, among a few other things.
Here is how:
- Avoiding double taxation: Business that operate as a C corporation can buy real estate like as asset or inventory and the expenses of owning it are treated as ordinary expenses on the income statement. But when the real estate is sold, the profits are taxed twice – at the corporate and the individual level. If instead the real estate is held in a pass-through entity, like an S corporation or LLC, and then leased to the corporation, the profit on sale will be taxed just once at the individual level.
- Gaining the best value in tax benefits: Buying the property may seem like the inexpensive way to maximize tax benefits. However, liabilities related to the property get transferred to the owner and put other assets and the business at risk. Instead, by holding real estate as a limited liability entity – either an LLC or a limited partnership if multiple owners are involved – is the best way to maximize tax benefits without risk. Of course, one must ensure all entities are insured.
- Developing the right strategy to profitably own real estate: By owning real estate but treating it like any other business asset, you expose the business to significant risk. When a company owns real estate, there are many complexities involved, for which you need to find the right strategy to protect yourself legally while minimizing your tax liability.
- Separating the real estate from the company in family businesses: A family business can pass from one generation to the next, thereby having many family members participating in the ownership. By separating the real estate from the business, there are more options available to cater to the needs of the multiple owners. For instance, one sibling can operate the business and the other can own the real estate, and both still benefit. Moreover, they don’t have to share control but can gain the benefits as property owners.
These are the fundamental reasons why it’s a good idea for owners to separate the real estate from the business.