Can I Buy a House With My Business?

While property ownership is often personal, businesses can also acquire and hold real estate. This strategy offers distinct advantages and opportunities for growth. It involves navigating a different set of legal, financial, and tax considerations compared to an individual purchasing a home. This article explores the practical steps and factors involved when a business seeks to purchase real estate.

Establishing Business Ownership of Real Estate

A business’s legal structure determines its ability to own real estate. Entities like Limited Liability Companies (LLCs) or corporations (S-Corps, C-Corps) are separate legal persons, allowing them to hold assets, including property, in their own name. Even a sole proprietorship can own property, though it does not provide the same liability separation as other structures. The property deed must be formally titled in the business’s name, clearly indicating the entity as the legal owner. This ensures the business, not the individual owner, is recognized as the property holder.

Before acquiring property, a business must meet foundational requirements. The business entity needs to be properly formed and maintained in good standing with relevant state authorities. For multi-owner entities, the operating agreement for an LLC or the corporate bylaws for a corporation should explicitly permit real estate ownership and outline the decision-making process for such investments. Defining these parameters upfront helps ensure all stakeholders are aligned and the business is legally prepared for the transaction.

Financing a Business Property Acquisition

Financing a business property acquisition involves commercial lending products and processes distinct from residential mortgages. Traditional commercial mortgages are a common option, often requiring a down payment ranging from 10% to 30% of the purchase price, with repayment terms typically shorter than residential loans, such as 5 to 20 years. Lenders evaluate the business’s financial health, including its cash flow, profitability, and existing debt, alongside the property’s income-generating potential.

SBA loans, like the 7(a) and 504 programs, offer favorable terms for eligible small businesses acquiring real estate. The SBA 7(a) loan is versatile, with maximum amounts up to $5 million and repayment terms extending up to 25 years for real estate. These loans are often used for owner-occupied properties, where the business occupies at least 51% of an existing building or 60-61% for new construction. The SBA 504 loan specifically targets fixed asset purchases like real estate and machinery, typically involving a partnership between a private lender and a Certified Development Company (CDC).

Lenders require a comprehensive application package including business financial statements, tax returns, and a detailed business plan outlining the property’s use and its contribution to the business’s revenue. A personal guarantee from the business owner is frequently a requirement for commercial real estate loans, especially for smaller businesses. This guarantee pledges the owner’s personal assets as collateral, providing additional security for the lender if the business defaults. Owner financing, where the seller directly provides a loan, can offer more flexible terms than traditional bank loans, though it often involves a balloon payment within a few years.

Tax Implications of Business Property Ownership

Owning real estate through a business entity has various tax implications. A primary benefit is the deductibility of ordinary and necessary property expenses. These include mortgage interest, property taxes, insurance premiums, utilities, and maintenance costs. These deductions reduce the business’s taxable income, lowering its tax liability.

Depreciation is another tax advantage for business-owned real estate. The IRS allows businesses to deduct a portion of the property’s value annually for wear and tear. Commercial real estate is generally depreciated over 39 years using the straight-line method, meaning the building’s cost (excluding land value) is spread evenly over this period. For example, if a commercial building costs $800,000 (excluding land), the annual depreciation deduction would be approximately $20,512.

When the business sells the property, capital gains tax implications arise. The taxable gain is calculated based on the sale price minus the adjusted basis, which is the original cost reduced by accumulated depreciation. Any depreciation previously claimed will be “recaptured” and taxed as ordinary income, up to the amount of the gain, with the remaining gain taxed at capital gains rates.

Legal and Operational Considerations

Operating a business that owns real estate involves legal and operational considerations beyond financial and tax aspects. A fundamental advantage of owning property through a separate business entity, such as an LLC or corporation, is liability protection. This legal separation generally shields the personal assets of the business owner from liabilities and debts incurred by the business related to the property. For instance, if a lawsuit arises from an incident on the property, the claimant would pursue the business’s assets, not the owner’s personal savings or home.

Maintaining this liability protection requires strict adherence to corporate formalities and a clear separation between business and personal finances. Failing to keep business finances distinct from personal funds, known as “commingling,” can lead to a court “piercing the corporate veil,” which removes personal asset protection and holds owners personally responsible for business liabilities. To prevent this, a business should establish dedicated bank accounts and credit cards, use them exclusively for business transactions, and ensure all income and expenses flow through these accounts. Regular and accurate record-keeping for property-related income and expenses supports financial transparency and simplifies tax preparation.

Businesses must also comply with local zoning laws, building codes, and other regulatory requirements for commercial properties. These regulations can dictate how a property can be used, any necessary modifications, and ongoing operational standards. If the business plans to lease out portions of the property, effective property management practices, including lease agreements and tenant relations, become ongoing operational responsibilities. These measures contribute to the business’s legal integrity and its ability to manage its real estate asset.