How to Buy a House With Your Business

Purchasing real estate through a business entity presents a distinct approach to property ownership. This strategy involves navigating various considerations, from selecting the appropriate business structure to understanding specific tax implications and the procedural steps of acquisition. Business ownership of property integrates real estate assets directly into an operational framework, which can differ significantly from personal property acquisition.

Selecting the Business Structure

Choosing the correct business structure is a foundational decision when a business intends to own real estate. This choice impacts ownership, liability separation, and how the entity files its general income taxes. Common structures include Limited Liability Companies (LLCs), S-Corporations, and C-Corporations, each with unique characteristics that influence real estate holdings.

An LLC offers liability protection, separating personal assets from business debts. For tax purposes, an LLC can be flexible, often treated as a pass-through entity where profits and losses are reported on the owners’ personal tax returns, avoiding double taxation. This means the business itself does not pay federal income tax; instead, the income is “passed through” to the owners.

An S-Corporation also functions as a pass-through entity, meaning it avoids corporate-level income tax, and profits and losses are passed directly to the owners’ personal income. S-Corporations also provide liability protection. However, S-Corporations have stricter eligibility requirements, such as limits on the number and type of shareholders.

A C-Corporation is a separate legal entity from its owners, providing strong liability protection. Unlike LLCs and S-Corporations, a C-Corporation is subject to corporate income tax on its profits, and shareholders are taxed again when they receive dividends, a phenomenon known as double taxation. This structure can be suitable for businesses planning to retain earnings for reinvestment or those seeking to attract a large number of investors.

When deciding, owners should consider the number of individuals involved in the business, the desired level of personal liability protection, and future plans for the property. Seeking advice from legal and tax professionals can help align the business structure with long-term objectives and compliance requirements.

Funding the Acquisition

Securing capital is a primary step for a business to acquire real estate, involving various funding methods and lender requirements. Businesses typically explore options such as commercial mortgages, Small Business Administration (SBA) loans, owner contributions, or utilizing retained earnings.

Commercial mortgages are a common financing tool for business real estate. Lenders assess the business’s financial health, the property’s income-generating potential, and the borrower’s creditworthiness. Down payment requirements for commercial real estate loans typically range from 15% to 35% of the purchase price, with repayment terms often shorter than residential mortgages, generally spanning five to 20 years. Interest rates for commercial real estate loans can vary widely, influenced by factors like loan type, property characteristics, and borrower creditworthiness.

SBA loans, particularly the 504 loan program, are designed to help small businesses acquire real estate and equipment. These loans often feature lower down payments, sometimes as low as 10% for established businesses, and longer repayment terms, such as 20 or 25 years, with fixed interest rates. To qualify for an SBA 504 loan, a business needs to be for-profit, have a net worth below $15 million, and use the property primarily for its operations, typically occupying at least 51% of an existing building. Lenders will require comprehensive documentation, including business financial statements, tax returns, and a detailed business plan.

Owner contributions serve as another funding source, where the business owners inject personal capital into the acquisition. This can reduce the amount of external financing needed and demonstrate a strong commitment to the project, which can be favorable to lenders. Retained earnings, which are accumulated profits not distributed to owners, can also be leveraged to fund a property purchase. Utilizing these internal funds can lower debt obligations and associated interest costs.

Lenders require a thorough review of financial documents. This includes business and personal tax returns, bank statements, asset and liability statements, and a comprehensive business plan detailing projected cash flows and operational strategies. A strong debt service coverage ratio (DSCR), which compares the business’s net operating income to its debt payments, is a metric lenders evaluate, often looking for a ratio of 1.25x or greater.

Understanding Business Real Estate Taxation

Real estate owned by a business is subject to specific tax rules and implications that can influence financial outcomes. Understanding these provisions is essential for compliance and effective financial management. Various expenses related to the property can be deducted, and income generated from its use is treated according to tax regulations.

Depreciation is a deduction for business-owned property, allowing the recovery of the cost of the building over its useful life. Commercial buildings are generally depreciated using a straight-line method over 39 years, while land itself is not depreciable. Certain improvements, like leasehold improvements or specific components identified through a cost segregation study, may qualify for shorter depreciation periods, such as 5, 7, or 15 years.

Mortgage interest paid on loans used to acquire or improve a business property is fully deductible. This deduction can substantially reduce taxable income, especially in the early years of a mortgage when interest payments are higher. Property taxes assessed on the business property are also deductible expenses, reducing the business’s overall taxable income.

Operating expenses, such as utilities (electricity, water, gas), property insurance, and property management fees, are deductible costs incurred in the operation and maintenance of the property. Repairs and maintenance, including plumbing work or HVAC servicing, are also deductible expenses.

If the property generates rental income, this income must be reported, and related expenses can be deducted against it. For properties with partial personal use, expenses must be allocated between business and personal use. For instance, if a portion of a home is used for business, the business portion of expenses like mortgage interest, real estate taxes, utilities, and depreciation can be deducted. The personal use of a business property may require fair market rent to be charged to avoid tax complications.

Upon the sale of a business-owned property, capital gains taxes may apply. The gain is calculated as the sale price minus the adjusted basis of the property. Additionally, any depreciation previously taken on the property is subject to “depreciation recapture” at a rate of 25% at the time of sale. This means that while depreciation reduces taxable income during ownership, a portion of that tax benefit is recouped by the IRS when the property is sold. Maintaining meticulous records for all property-related income and expenses is crucial for accurate tax reporting and substantiating deductions during potential audits.

Navigating the Purchase Process

Once the preparatory decisions regarding business structure, funding, and tax implications are understood, the actual acquisition of the property involves several procedural steps. This process requires thorough due diligence, careful negotiation of the purchase agreement, and precise execution at closing. Each stage ensures the business acquires the property under favorable and legally sound terms.

Due diligence is a phase where the business investigates the property to identify any potential issues before committing to the purchase. This includes verifying zoning regulations to ensure the property can be used for the intended business purpose. Environmental assessments are often conducted to check for hazardous materials or conditions that could pose future liabilities. Property inspections are also essential to evaluate the structural integrity and overall condition of the building, identifying any necessary repairs or maintenance.

The purchase agreement is a legally binding contract outlining the terms and conditions of the sale. It must clearly identify the business entity as the buyer, including its full legal name and proof of authority for the signing representatives. Key elements of this agreement include the purchase price and payment terms, a detailed description of the property, and contingencies such as financing approval or satisfactory inspection results. Legal counsel plays a significant role in drafting and reviewing this agreement, ensuring it protects the business’s interests and complies with all applicable laws.

The closing process finalizes the transaction, transferring ownership from the seller to the business. This involves the transfer of the property title, often facilitated by a title company that ensures a clear title free of encumbrances. Funding disbursement occurs at this stage, with the loan proceeds and the buyer’s down payment being released to the seller. All necessary paperwork, including deeds and financing documents, are signed and recorded.

Throughout the purchase and subsequent ownership, maintaining separate business records for the property is important. This includes all financial transactions, such as purchase costs, loan payments, income generated, and deductible expenses. This record-keeping is essential for accurate financial reporting, tax compliance, and demonstrating the property’s dedicated business use. Legal counsel can provide guidance throughout these procedural steps, from reviewing contracts and managing title issues to ensuring compliance with regulations.