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Titling a building to your tax advantage
Dear Tax Talk,
I am going to buy a building in which I plan on
conducting my business of producing machined parts. The C corporation
that owns the machine business (which I own 100 percent) will pay
rent to the real estate entity. What is the most tax-advantageous
form of entity to title this building: individual with plenty of insurance,
LLC, C corp, S corp, etc.?
Thanks,
Dan
Dear Dan:
A lot of business owners like to separate the real property
used in the business from the entity that operates the business.
It sometimes makes sense; you may sell the operating business, but
the prospective purchaser may not be interested in the property
so having the building separate facilitates the sale.
Attorneys also advise you do this for protection from
creditors. For example, if the business is going down the tubes
and the property is not within the company, it could be creditor-proof.
The downside is that you have to maintain a separate bank account
and, in some states, you could end up paying sales tax on the rent.
If the advantages outweigh the disadvantages then
it probably makes the most sense to own the property individually
since this is the lowest-cost solution. There's no organization
costs involved and you don't have to file a separate tax return.
Of course, as you point out, you need to carry sufficient insurance
to protect you from a possible slip-and-fall lawsuit or some other
type of liability such as environmental issue.
An LLC could also help provide some liability protection,
but you need to check with your attorney on this as it is a legal
issue. Since you're the only member of the LLC, it's disregarded
for tax purposes so that you don't have to do a separate tax return.
An S corporation is a possibility, but I generally
don't like an S corp for financed property. Without getting too
technical, a financed property could lead to additional tax issues
when it's held within an S corp.
A C corporation is definitely not the way to go as
you lose the lower tax rates applicable to capital gains. Unlike
individuals, conventional corporations do not have preferential
capital
gains rates. This could mean that you end up paying 60 percent
or more in taxes on an eventual sale of the property.
All the other forms of ownership will allow you to
qualify for 15-percent long-term capital gains rates. And definitely
check out the sales tax issues and determine if there's a better
way to avoid paying this tax in your state.
-- Posted: Sept. 4, 2003
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