Tax Benefits Of Keeping Business Related Real Estate Out Of Family Owned Corporations

Tax Benefits Of Keeping Business Related
Real Estate Out Of Family Owned Corporations

by Bernard Fruchtman, Esq.
( This article is excerpted from TaxTalk – Plain & Simple)

Background:

An important reason to keep business real estate out of family owned corporations is to avoid double taxation upon the sale of the real estate.

Whenbusiness related real estate is owned in a family corporation and sold the following taxes apply:

  • Corporate. The corporation will own capital gains tax on the difference between its tax basis (generally, cost less depreciation) and its selling price.
  • Shareholders. The shareholders of the corporation will owe a tax when the sales proceeds are distributed to them via a dividend or liquidating distribution.

ALERT: It’s possible to avoid the double taxation if the family business is operated under a S-Corporation.

Tax Benefits Of Separate Ownership Of Real Estate:

Even if a S-Corporation is used as the business entity it’s still better to own business real estate individually and lease it to the corporation. This type of arrangement will allow you to achieve the following tax benefits:

    1. Rental income paid by the corporation to you is not be subject to payroll taxes. This allows you to withdraw money from the corporation without incurring payroll taxes that do apply to amounts taken out as compensation.
    1. A sale of the property will only be taxed once, at favorable capital gains rates.
    1. You can obtain cash, tax-free, by borrowing against the property.
  1. If you own the property at the time of your death, all capital gains tax on the property’s value as of that date are eliminated.

Your heirs inherit the property with a stepped-up basis. A stepped-up basis means that your cost of the property for purposes of figuring any gain on a subsequent sale of the property is equal to its fair market value on the date of your death.


Bernard Fruchtman, Publisher/Editor of TaxTalk – Plain & Simple. TaxTalk – Plain & Simple, is a monthly newsletter that helps you save money by reducing your taxes. An annual subscription is $48 per year. For more information and a FREE ISSUE see web page at:

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