For many businesses, combining real estate assets with other company assets in a single entity can pose significant risks. Whether you’re concerned about liability from property-related injuries or the impact of legal issues on property ownership, there are also important tax considerations to keep in mind. Here’s why holding real estate separately might be beneficial.
Avoiding Double Taxation Pitfalls
Operating as a C corporation might seem like a straightforward way to handle business assets, including real estate. However, this can lead to double taxation when the real estate is sold: first at the corporate level, and then at the individual level when distributions are made to shareholders. This can result in significant financial drawbacks.
By holding real estate in a pass-through entity such as a limited liability company (LLC) or limited partnership, and leasing it to the corporation, you can avoid double taxation. Profits from the sale would be taxed only once, at the individual level, reducing the overall tax burden.
Maximizing Your Tax Efficiency
While purchasing property outright can seem like an easy solution, it exposes the owner to direct liabilities, potentially putting other personal and business assets at risk. This undermines the protective benefits of structuring your business as a corporation.
The recommended approach is to hold real estate within a separate limited liability entity, such as an LLC. This structure helps protect personal and business assets while providing tax efficiencies. If multiple owners are involved, a limited partnership can achieve similar benefits. Ensure all entities are adequately insured to further mitigate risks.
Customizing Your Business Strategy
Owning real estate as part of your business involves navigating complex legal and tax landscapes. A one-size-fits-all solution doesn’t exist, and treating real estate like other business assets without proper strategy can expose your business to unnecessary risks. Patten and Company LLC can provide a tailored assessment to help you protect your business and minimize your tax liabilities effectively.
Enhancing Flexibility for Family Businesses
Family-owned businesses often face unique challenges, especially when multiple family members are involved in ownership. Separating real estate from the business can offer flexible solutions to meet diverse needs.
Consider a scenario where a family business transitions to the next generation. One child may want to operate the business but lacks the resources to purchase both the business and the real estate. By separating the two, one sibling can take over the business while others benefit from owning the real estate, ensuring everyone gains without sharing control of the business operations.
Conclusion
The intricacies of owning real estate within a business require thoughtful planning and strategic management. At Patten and Company LLC, we understand these complexities and can help you develop a strategy that minimizes tax liabilities and protects your assets.
Contact Patten and Company today to discuss how we can assist in separating your real estate assets and optimizing your business structure for maximum efficiency and protection.
