Do you operate a business out of a building you also own? Are you considering buying a building after years of leasing one? Then you may have an excellent opportunity to reduce your tax bill. However, this opportunity isn't without some risk. To help you decide whether or not you should pursue it, here are some pros and cons of leasing back your own real estate.
What Is a Leaseback?
Leasing your property back to your own business can also be referred to as self-renting. Basically, the property is transferred to a separate legal entity, such as an S corporation, which you also own. The business pays market rent to the landlord and deducts that as rent expense on its own taxes. The landlord business declares the income and deducts all the allowable expenses of property ownership in turn.
What Are the Benefits of Leasing Your Own Property?
It's clear to see how this could easily reduce the overall tax obligation of the owner. The renting business, in particular, gets a big tax deduction from paying rent. However, the property owner can also deduct many expenses to offset the income it must declare. Adding up those expenses could result in little or no income to pay taxes on or even a loss that can be used in future years.
What Are the Drawbacks?
As helpful as this strategy can be, it also has some potential pitfalls.
The IRS knows that this method could be misused since the landlord and tenant are essentially the same persons. Therefore, it pays attention to how you structure the arrangement. You must treat it as a standard landlord/tenant business relationship. This means a written lease agreement, consequences for failure to pay, monthly rent payments, and a market rental rate. Never try to unduly inflate the tax benefits.
In addition, you will become both landlord and tenant — and the best interests of both parties may not always align. If the real estate market goes up, the landlord might do their best to sell the property for a good profit. But the tenant business doesn't want to move. This is a difficult conundrum to solve. It also makes recordkeeping and tax filing more complex.
Where Can You Learn More?
Should you adopt this tax strategy? Or would you get similar tax benefits from a less complicated plan? Find out by meeting with a tax planner service such as Golden Tax Relief in your state today. No matter what route you choose, tax planning will help you keep your business profitable and your bills lower.
