Asset Protection

Real Estate Planning for Business Owners: Separate, Protect, and Optimize

Strategic Property Ownership Structures

Business owners with real estate need strategies to protect assets, optimize taxes, and transfer wealth. Learn LLC structures, cost segregation, and 1031 exchanges.

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Capital Gains Tax with Proper 1031 Planning

30%

Typical Valuation Discounts for LLC Interests

5-15 Years

Accelerated Depreciation via Cost Segregation

60%

Bonus Depreciation Rate (2024)

Quick Answer

Separate real estate from operating company in a distinct LLC - protects property from business liabilities
Charge fair market rent to create deductible expense for operating company and tax-advantaged income for real estate LLC
Cost segregation can accelerate $400K+ in first-year depreciation deductions on $2M property purchases
1031 exchanges defer capital gains indefinitely - at death, heirs receive stepped-up basis eliminating the gain
LLC ownership enables 25-35% valuation discounts for estate planning, transferring $5M property at $3.5M value

The Opportunity

Why Real Estate Planning Matters

Liability Separation: Protect Assets from Business Risk

Holding business real estate in a separate LLC protects it from operating company liabilities. If the operating company is sued, the real estate is owned by a different entity and cannot be reached by creditors. This simple structure can protect millions in property value from business lawsuits.

Rental Income Shifting: Create Tax-Advantaged Cash Flow

The operating company pays market-rate rent to the real estate LLC, creating a tax-deductible expense for the operating company. The real estate LLC receives rental income that can be offset by depreciation, interest, and property expenses - often resulting in tax-free cash flow to the owner.

Estate Planning Advantages: Transfer Value Efficiently

Holding real estate in LLCs facilitates estate planning through valuation discounts (lack of marketability and control), gradual ownership transfers to family members, and dynasty trust strategies. A $5M property in an LLC might transfer at $3.5M for gift tax purposes after discounts.

1031 Exchange Flexibility: Defer Capital Gains Indefinitely

Real estate held separately from the operating business can be sold and exchanged for other investment property under IRC Section 1031, deferring capital gains indefinitely. Upon death, heirs receive stepped-up basis, potentially eliminating the deferred gain entirely.

Implementation

Proven Strategies

Separate Real Estate Holding Company

Form a separate LLC to own business real estate. The operating company leases the property from the real estate LLC at fair market rent. This creates liability separation, rental income shifting, and estate planning flexibility. The real estate LLC is typically owned by the same individuals who own the operating company.

Best for: Any business owner whose company occupies real estate worth protecting from business liabilities.

Example:

Manufacturing company worth $3M operates from $2M building. Building transferred to new LLC. Operating company pays $200K annual rent (market rate). Real estate LLC after depreciation shows minimal taxable income. Building protected from manufacturing liability claims.

Cost Segregation for Accelerated Depreciation

Cost segregation studies reclassify building components (electrical, plumbing, fixtures) from 39-year property to 5, 7, or 15-year property, accelerating depreciation deductions. Combined with bonus depreciation (60% in 2024), this can generate substantial year-one tax deductions for property purchases or improvements.

Best for: Business owners purchasing commercial property or making significant improvements who want to accelerate tax deductions.

Example:

$2M commercial building purchase. Standard depreciation: $51K/year. Cost segregation identifies $600K as shorter-life property. First-year depreciation with bonus: $400K+ vs $51K. At 37% bracket: $130K additional tax savings in year one.

1031 Exchange into Higher-Value Property

Sell appreciated business real estate and exchange into higher-value investment property under IRC Section 1031. All capital gains are deferred indefinitely. Continue exchanging throughout lifetime, then heirs receive stepped-up basis at death - potentially eliminating all deferred gains. Consider Delaware Statutory Trusts (DSTs) for passive diversified ownership.

Best for: Business owners selling appreciated real estate who want to defer capital gains and potentially eliminate them through stepped-up basis.

Example:

Sell $3M property (basis $1M, $2M gain). Instead of $476K capital gains tax, exchange into $5M property. Continue deferring. At death, heirs inherit at $5M stepped-up basis. $2M+ in gains never taxed.

Avoid These Pitfalls

Common Mistakes

Keeping Real Estate in Operating Company

Real estate owned directly by the operating company is exposed to all business liabilities. A lawsuit or bankruptcy could result in losing the property. The 30 minutes required to transfer real estate to a separate LLC can protect millions in property value from future claims.

Not Charging Market-Rate Rent

If the operating company pays below-market rent to a related real estate LLC, the IRS may recharacterize the arrangement. Always charge fair market rent supported by comparable analysis or appraisal. This also maximizes the legitimate tax deduction for the operating company.

Missing Cost Segregation Opportunities

Many property owners use standard 39-year depreciation when cost segregation could accelerate hundreds of thousands in deductions. The cost segregation study costs $5K-$15K but can generate 10x+ that amount in first-year tax savings. Consider for any property purchase over $750K.

Questions

Common Questions

Here are the most common questions we receive about this topic.

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Work with an attorney to form the new LLC and prepare a deed transferring the property. Consider: existing financing (lender approval may be needed), transfer taxes (vary by state), title insurance requirements, and environmental due diligence. The process typically takes 2-4 weeks and costs $2K-$10K depending on complexity and property value.

Generally no, if done correctly. Transfers to single-member LLCs are typically tax-free as disregarded entities. Transfers to multi-member LLCs owned by the same parties in the same proportions are usually tax-free under IRC Section 721. However, some states charge transfer taxes regardless. Consult your tax advisor before transferring.

Charge fair market rent based on comparable properties in your area. Document with market research, broker opinions, or formal appraisals. The rent should be what an unrelated third party would pay for similar space. Both too high and too low rent can create IRS problems - aim for defensible market rates.

Cost segregation is a tax strategy that identifies building components eligible for accelerated depreciation (5, 7, or 15 years instead of 39 years). A cost segregation study costs $5K-$25K depending on property complexity. Generally worth it for properties over $750K-$1M, especially with current bonus depreciation rules allowing 60%+ first-year deductions.

Yes, but with conditions. The property must be held for investment or productive use in trade or business. If you sell and exchange into new business property, qualify. If you exchange into purely personal use property, does not qualify. Consult a qualified intermediary and tax advisor before proceeding with any 1031 exchange.

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Your business real estate deserves strategic planning. Let us help you protect assets, optimize taxes, and position for efficient wealth transfer.

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