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Taking Full Advantage of Corporate Real Estate Tax Benefits

Real Estate - Gray BuildingThere are real estate tax opportunities that companies can leverage throughout the year to address acute business needs without jeopardizing future finances. With you placed in the role of a corporation owner, below is a hypothetical example.

Cash From Strategic Asset Liquidation

Imagine you own a corporation that offers tourism services throughout Texas, and Austin is one of your most lucrative cities. Your company needs additional buses to provide a new offering: drive-by tours of famous Austin music venues. To raise capital, you could sell your company’s Austin bus washing station, whose value is depreciated to zero. However, you need the station for existing buses and will need it for the new ones, too. What should you do?

While you could always liquidate an asset that is less integral to your business, there is also a fiscally-sound opportunity for liquidating the bus washing station and receiving real estate tax benefits. You could enter into a sales-lease transaction with your company by personally buying the station, and then leasing it to the company on terms that predict a fair ROI (return on investment) without overstepping the operating budget.            

Benefits of the Sales-Lease Agreement

By purchasing the bus washing station and leasing it to your company, the Austin location receives the capital it needs to acquire buses for the new tourism offering, while retaining use of the wash station to keep its Austin bus fleet free of unsightly grime.

Now, your company could deduct the lease payments, and you, as the new property owner, could claim depreciation on a property that was no longer providing deductions. Deductions for depreciation could tax shelter a portion of your lease income. All future gains would be yours alone, letting you collect payment without accepting a nondeductible dividend from the company.

This scenario could be especially attractive if you plan to retire soon. The lease agreement would provide you with passive income, the tax on which could be mitigated by claiming passive losses on tax shelter investments. Maintaining ownership of the wash station would give you equity in the company, with the option to sell the property and re-invest elsewhere.   

If you chose to liquidate the property, you should estimate your tax burden for the transaction well in advance to identify all real estate tax benefits that could sweeten the deal. As a general estimate, you would likely incur a tax of 25% on the depreciation you have claimed, plus a maximum capital gains tax of 15% on long-term gains from property appreciation. If your company owned the property instead, the appreciation would draw a tax of 34%.  

Conclusion

For this arrangement to work, the useful life of the wash station must be longer than the term of the lease, and all terms of the transaction must align with fair market value. Sustaining the real estate tax benefits of owning the property requires the duality of assuming financial risk to realize financial gain. Because the benefits and burdens of tax implications would impact the reciprocity of the relationship, you and an experienced CPA from Maxwell Locke & Ritter should evaluate the deal before it is official.

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