Real estate (land and buildings) is commonly held in a separate legal entity from business operation assets. Typical tax structures for these types of property owning entities would be LLCs or Partnerships, also commonly referred to as "flow through entities." Understanding the benefits of these structures can help you take advantage of planning opportunities that may be appropriate for your business.
When setting up the legal structure for ownership of business assets, be sure to include an assessment of various liability issues as part of your risk management analysis. For instance, if someone were to get injured on your property (let’s say a customer or employee slips on an icy sidewalk), a lawsuit may ensue. Separating real estate from business operating assets can help prevent the economic consequences of an unfavorable outcome from adversely impacting the business. Similarly, if your business runs into financial difficulties, real estate owned separately from the business can be protected from business creditors and the like.
Real estate entities can also be great vehicles for income tax planning purposes. For example, ownership in a real estate entity can be shared with a business owner’s children, often establishing trusts for the benefit of these individuals. In this structure, the rent expense charged to the business entity is a deductible business expense that will result in lower income to the owner. With the enactment of the new Medicare surtax, this reduction in income may now be more valuable to the business owner. Also, the rental income that flows to the owner's children may be taxed at a lower rate and avoid the Medicare surtax. Should a sale take place, any gain that arises may be taxed at the children’s lower rates, should children not be subject to the so-called "kiddie-tax."
Estate tax planning opportunities can also arise when future heirs have ownership interests in appreciated real estate. Without such ownership, the appreciated assets would pass to heirs upon the decedent's death and also be part of the decedent's estate tax filing, which can be costly.
A steady positive cash flow arising from rental income passing through to one’s children can also be useful in funding college tuition and related costs.
Please contact us at 215.441.4600 if you have questions or would like to discuss how this topic impacts your business.
Does your business keep its real estate and business assets separate? Any insight you can offer? Share in the comments.
