So the business is up and running, and you've decided you want to move into permanent space. After careful thought (considering the points discussed here), you've decided to buy the building that houses your business.
Who should own it?
The right answer needs to consider your tax structure and your estate and family planning.
Many older businesses are set up with the business owner having personal title to the real estate and renting it to the business. This remains a useful tactic:
- It gives C corporation owners a way to get cash out of their businesses without incurring taxable dividends. C corporation earnings are normally taxed twice - once on the corporate tax return as it is earned, and again as dividends when distributed.
- A variation of this can help with estate planning. The building is purchased by the next generation on a mortgage and leased to the business. The lease funds the debt service, and the equity buildup goes to the next generation. This can be an efficient estate planning tool.
- It can make it easier to sell your business. A buyer may not want the real estate, for any number of reasons. Getting appreciated real estate out of a business can be a tax nightmare. Closing a business sale is hard enough without complicating it with unwanted assets.
- Iowa's tax rules enable a tax-free sale of business real estate if it has been used in a business in which the taxpayer has "materially participated" for ten years -- if the land has also been held for ten years. A similar exclusion is also available if all of the assets of a business are sold, but that break doesn't apply to sales of part of a business, or to sales of corporate stock or partnership interests. Where the business sale has to be a stock deal, owning the real estate separately can allow at least part of the deal to avoid Iowa tax.
Reading between the lines, you may have deduced that owning real estate in a corporation can be awkward. If you already own real estate inside a corporation, it is probably best to leave it there. If you are acquiring new real estate, though, it is usually best to own it individually or in a partnership (including LLCs).
If your business itself is in a partnership format, including an LLC, it matters less who owns the real estate. It is much easier to shuffle assets into and out of a partnership without incurring tax than it is with a corporation (but not so easy that you should try it without tax advice).
Of course every situation is different. If you have co-owners of your business, ownership of real estate can become a sore point. You have to set a fair rent to keep co-owners and the IRS happy. Your lenders may have something to say about your decision. And you can't let the tax tail wag the business dog. Be sure to work closely with your tax and legal advisers before you commit to anything.