Can You Buy a House Through Your Business?

Individuals can acquire real estate through a business entity, such as a corporation or a limited liability company, rather than as a personal asset. This approach separates personal liabilities from business operations and financial obligations, offering advantages in asset management.

Selecting a Business Structure for Property Ownership

Selecting the appropriate business entity is important when purchasing real estate. Common structures include Limited Liability Companies (LLCs), S Corporations, and C Corporations. Sole proprietorships and partnerships are generally less suitable due to a lack of personal liability protection.

An LLC offers liability protection, separating the owner’s personal assets from business debts. Income and losses from an LLC “pass through” to the owners’ personal tax returns, avoiding double taxation.

S Corporations also provide liability protection and pass-through taxation. However, they have stricter operational requirements and limitations on shareholders, making them more complex to maintain than an LLC.

C Corporations offer strong liability protection, as the corporation is a separate legal entity. Profits are taxed at the corporate level and again when distributed as dividends, known as double taxation. This structure can benefit businesses retaining earnings for reinvestment or seeking equity financing.

An LLC is often favored for real estate due to its balance of liability protection and simplified tax treatment.

Acquiring Real Estate Through a Business

Acquiring real estate through a business entity involves different procedural steps than a personal home purchase. Businesses typically obtain commercial loans, which often require higher down payments (20-35%) and shorter repayment terms (5-20 years) than residential mortgages. Interest rates vary based on the business’s creditworthiness and property type.

Other financing options include lines of credit, owner financing, or self-financing using business capital. Lenders assess the business’s financial stability, credit history, and investment viability, often requiring detailed business plans.

The property’s title must be in the business entity’s name, such as “ABC LLC,” not the individual owner. This reinforces the separation of assets. The purchase process follows standard real estate transaction steps, including negotiation, due diligence, and signing a purchase agreement.

The business entity, through its authorized representatives, executes all contracts. Due diligence for a business acquisition may involve reviewing the business’s operating agreement or corporate bylaws to ensure proper authorization for the purchase.

Tax Treatment of Business-Owned Property

Businesses can deduct various operating expenses for property, including mortgage interest, property taxes, insurance premiums, and utility costs. Routine repairs and maintenance are generally deductible in the year incurred. Significant improvements that add value are capitalized and depreciated over time.

Depreciation is a tax benefit, allowing businesses to recover the property’s cost over its useful life, excluding land value. Residential rental properties are depreciated over 27.5 years, while non-residential real property is depreciated over 39 years, using the Modified Accelerated Cost Recovery System (MACRS). This non-cash deduction reduces taxable income.

Income from business-owned property, such as rental income, must be reported by the business entity. For pass-through entities like LLCs and S Corporations, this income flows to owners’ personal tax returns. For C Corporations, income is taxed at the corporate rate.

When the property is sold, any capital gain, which is the difference between the sale price and the adjusted basis of the property, is subject to capital gains tax. The adjusted basis accounts for original cost plus improvements, minus accumulated depreciation. Capital losses can offset capital gains or, in some cases, ordinary income.

Managing Personal Use of Business Property

Using a business-owned property for personal purposes introduces complexities and strict rules from tax authorities. The IRS scrutinizes situations where business assets serve dual purposes. If an owner uses the business property for personal reasons, the business must charge fair market rent for that usage. Failure to charge fair market rent can lead to the disallowance of business deductions related to the property. The IRS may reclassify the personal use as a taxable distribution to the owner if no rent is paid.

Personal use can also significantly limit or disallow certain business deductions, particularly under rules similar to the “vacation home rules” outlined in IRS Publication 527. If personal use exceeds certain thresholds, generally the greater of 14 days or 10% of the total days the property is rented at fair rental value, deductions may be limited to the amount of rental income generated. This means expenses like mortgage interest, property taxes, and utilities attributable to personal use might not be fully deductible as business expenses.

Meticulous record-keeping is paramount when a business property is subject to mixed use. Businesses must maintain detailed logs of business versus personal use, including dates, specific activities, and the individuals involved. All income and expenses related to the property must be clearly documented to substantiate claims made on tax returns.

Ongoing Management of Business Real Estate

Effective ongoing management of business real estate requires disciplined financial and administrative practices. Maintaining separate bank accounts and financial records for the business, distinct from the owner’s personal finances, is crucial. All income generated by the property, such as rental payments, and all expenses, including utility bills and maintenance costs, should flow through these dedicated business accounts.

Comprehensive record-keeping is essential for compliance and financial analysis. This includes maintaining detailed records of all income received, such as rent rolls or sales receipts, and all expenses paid, categorized appropriately for tax purposes. Documentation of maintenance activities, repair invoices, and any lease agreements or contracts related to the property must also be meticulously organized.

Businesses have options for managing the property itself. The owner can choose to self-manage the property, handling tenant relations, maintenance, and administrative tasks directly. Alternatively, a third-party property management company can be hired to oversee daily operations, which can be particularly beneficial for owners with multiple properties or limited time. Property managers typically charge a percentage of the rental income, often ranging from 8% to 12%, for their services.

Adequate insurance coverage is also a significant consideration for business-owned real estate. This typically includes commercial property insurance to protect against physical damage to the structure and liability insurance to cover claims arising from injuries or accidents on the property. Additional coverages, such as loss of income insurance, might be advisable depending on the property’s use. Businesses must also ensure compliance with local regulations, including zoning ordinances, building codes, and any necessary business licenses or permits required for the property’s specific use.