Business Owners Should Consider a Real Estate Purchase and Leaseback

If you’re a business owner, your company might own an office building, a warehouse, or other property. Assuming your company has owned the property for many years, the real estate may be generating few if any depreciation deductions. In such a situation, consider buying the property personally, perhaps using borrowed funds. Then your company can lease the property from you, so it will have continued use of the real estate.

Bountiful Benefits

Such a transaction can have advantages for you and for your company. The company will receive cash for expansion, hiring, and so on, even after paying tax on the gain. Ongoing lease payments from the company to you will be deductible for the company, replacing depreciation deductions that may have declined or disappeared altogether. At the same time, you’ll receive leasing income from the company.

You’ll have just purchased the real estate, in this scenario, so you’ll be able to start a new depreciation schedule, and the depreciation deductions can reduce the tax you’ll owe from this income stream.

Clearing the Hurdles

To obtain these benefits, you must enter into a valid sale and leaseback.

Here are the relevant rules:

•• You should pay a fair price for the building. Today’s depressed real estate market and low mortgage rates might make it easier for you to buy the property.
•• The lease payments should be comparable to what unrelated parties are paying for similar leases. Any lease renewals also must be set at fair rental value.
•• Any repurchase option also must be at fair market value.
•• The property’s useful life must be longer than the term of the lease.
•• You as the buyer must reasonably expect to make money on the deal, and you must have some risk of losing money.

Buying property from your company at a fair price in today’s environment might turn out to be a good investment—one made even better because of multiple tax benefits.

 

Copyright AICPA

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