How to Buy a House Through Your Business

Acquiring real estate through a business requires understanding various entity structures. Each structure dictates legal ownership and personal liability protection. Choosing the appropriate entity establishes the legal framework for holding the asset.

Limited Liability Companies (LLCs) are a popular choice for real estate ownership due to their flexibility and liability protection. An LLC creates a distinct legal entity. If the LLC incurs debts or faces legal action, members’ personal assets, like homes or savings, are generally shielded. The property’s title is held by the LLC, not individual members.

For instance, a lawsuit for an incident on the property would typically target the LLC, insulating owners’ personal wealth. An LLC can hold multiple properties, and some owners place each property within a separate LLC to compartmentalize risk. This isolates potential liabilities to individual assets.

Corporations, including S-Corporations and C-Corporations, offer liability protection by establishing the business as a separate legal entity from its shareholders. In a C-Corporation, the corporation owns the property and is separate from its owners. If the corporation faces legal issues, shareholders’ personal assets are generally protected.

S-Corporations also provide limited liability protection, functioning as separate legal entities that shield owners from business debts. The S-Corporation holds the property’s title. This protection safeguards personal assets like homes and savings from real estate legal issues such as tenant disputes or property damage.

Partnerships present a different dynamic for property ownership. A general partnership is not a separate legal entity; property title is held by each individual partner. All partners share equal responsibility and are jointly and severally liable for partnership debts, meaning personal assets can be at risk.

Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) offer variations. LPs involve general partners who manage the business and limited partners who contribute capital with limited involvement and liability. LLPs provide limited liability protection to each partner. In these forms, the property is considered partnership property.

Tax Implications of Business-Owned Property

Owning real estate through a business involves various tax implications, including deductible expenses, depreciation, rental income, and property sales. Understanding these aspects is important for financial management. Many operational costs can reduce taxable income.

Deductible expenses for business-owned real estate include property taxes, mortgage interest, and insurance premiums. These are ordinary and necessary costs incurred in the property’s operation and maintenance. Utilities, maintenance, repair expenses, and professional fees for accounting, legal, and property management services also qualify. Distinguish between deductible repairs and improvements, which must be depreciated. All deductible expenses must be reasonable and directly related to the business.

Depreciation allows businesses to recover property costs over its useful life, accounting for wear and tear. Land is not depreciable, but buildings and improvements qualify. The Modified Accelerated Cost Recovery System (MACRS) is the method for property placed in service after 1986. Residential rental property is depreciated over 27.5 years, and nonresidential real property over 39 years. A cost segregation study can reclassify building components, like land improvements or personal property, to shorter depreciation periods, accelerating deductions.

Bonus depreciation allows businesses to deduct a significant portion, or the full cost, of qualifying property with a useful life of 20 years or less in the year it is placed in service. Additionally, Internal Revenue Code Section 179 permits businesses to deduct the full purchase price of qualifying property, up to a dollar limit, in the year it is placed into service. This can include certain qualified real property improvements like roofs or HVAC systems.

Rental income from business-owned property is included in the business’s gross income. For pass-through entities like LLCs, S-Corporations, or partnerships, this income flows through to owners’ personal tax returns. This income may also qualify for the 20% Qualified Business Income (QBI) deduction if the rental activity is a trade or business.

To qualify for the QBI deduction, the activity must be conducted on a regular, continuous, and substantial basis. The IRS provides a safe harbor: a rental real estate enterprise is a trade or business if it maintains separate books, performs at least 250 hours of rental services per year, and keeps contemporaneous records. Without meeting these criteria, rental income might be classified as investment income, ineligible for the QBI deduction.

Personal use of business-owned property carries specific tax considerations. If a property is used for both business and personal purposes, all expenses, including depreciation, must be allocated proportionally. Personal use includes occupancy by the owner, family members, or renting at less than fair market value.

If a dwelling unit is rented for fewer than 15 days, rental income is not taxable, and rental expenses are not deductible. However, deductible items like mortgage interest and property taxes can still be claimed on Schedule A. Exceeding this threshold requires reporting rental income and allocating expenses. Misclassifying substantial personal use as business use can lead to disallowed deductions and limit deductible rental expenses to the amount of rental income, preventing a tax loss.

The sale of business-owned real estate triggers capital gains or losses. Commercial real estate is considered a capital asset, and its gain or loss is calculated separately. If held for less than one year, gain is usually taxed as ordinary income. If held for more than one year, gain is typically a long-term capital gain, subject to favorable tax rates. Internal Revenue Code Section 1231 provides advantageous treatment for gains and losses from the sale of depreciable business property held for over one year.

Depreciation recapture is a key consideration when selling depreciated business property. When a depreciable asset is sold for a gain, prior depreciation deductions are “recaptured.” For real property (Section 1250 property), this recaptured depreciation is taxed at a maximum rate of 25% as unrecaptured Section 1250 gain. If accelerated depreciation methods were used, excess depreciation is recaptured and taxed at ordinary income rates. Taxpayers report these sales on IRS Form 4797.

Financing Business Real Estate Purchases

Securing financing is a step when a business acquires real estate. Various financing options exist, each with distinct characteristics and requirements. Understanding these options and lender information requests is important for a successful transaction.

Commercial mortgages are a financing tool for business real estate. Unlike residential loans, commercial mortgages emphasize the property’s income-generating potential and debt coverage. These loans feature higher interest rates, shorter terms (5 to 20 years), and often include balloon payments. They usually require larger down payments, ranging from 20% to 30% or more.

The Small Business Administration (SBA) offers loan programs for real estate purchases. The SBA 7(a) loan program provides up to $5 million for various business purposes, including acquiring, refinancing, or improving real estate, with terms up to 25 years. The SBA 504 loan program is designed for owner-occupied commercial real estate, machinery, and equipment. It offers lower down payment requirements, often as low as 10%, and long fixed-rate terms (20 to 25 years). A condition for SBA 504 loans is that the business must occupy at least 51% of an existing building or 60% for new construction.

Businesses can utilize lines of credit for real estate acquisition or related needs. A business line of credit provides flexible, revolving access to funds up to a limit, allowing businesses to draw and repay as needed. These lines are often secured by business assets, including real estate equity, making them suitable for renovations, unexpected expenses, or smaller property purchases.

Seller financing offers an alternative to traditional bank loans, with the property seller acting as the lender. The buyer makes payments directly to the seller, who may retain the property title or hold a lien. This option can provide more flexible qualification criteria and lower down payment requirements, though terms often include shorter repayment periods and potentially higher interest rates than conventional loans.

Equity financing involves raising capital by selling ownership stakes in the property or project to investors. These investors become equity partners, contributing funds for a share of ownership and potential profits. Sources of equity capital range from individual investors and private equity funds to friends and family, allowing businesses to pool resources and leverage expertise.

Regardless of financing type, lenders require documentation to assess a business’s financial health and repayment capability. This includes financial statements like balance sheets, profit and loss statements, and cash flow statements, usually spanning two to three years. Lenders also request business tax returns for the same period, along with personal tax returns and financial statements from owners. A well-prepared business plan outlining the business model, financial projections, and how the property fits into the strategy is also a component of the loan application.

The Real Estate Acquisition Process