Owner Occupied Commercial Real Estate: What You Need To Know
Business owners looking to own their own property may be looking at owner occupied commercial real estate as a promising option because it allows for certain tax benefits, as well as more control over using the property and shaving off excessive rental costs. If you’re interested in investing in this kind of ownership, you’ll want to know how to structure the ownership of the new property. There are several options to consider, which can either limit or increase liability, but also provide benefits.
First, you could set up ownership as a limited liability company, or an LLC. This will insulate you from liability claims that can be incurred from the property since an LLC is its own legal entity, separate from yourself or your company. However, establishing an LLC can cost you more than other ownership options, particularly in taxes. LLCs with multiple owners will require them to file partnership tax returns at the federal and state level, which will likely add to your costs if you should need a professional tax preparer, and getting attorneys to set up the LLC will cost money as well. Additional taxes can also be an issue if a corporation buys the property, which can include double taxation at the personal and corporate level.
Operating a piece of owner occupied commercial real estate is simpler with a sole or joint ownership, as this arrangement only requires one more form on your personal tax return. Your rental income or losses from the property will be taxed at ordinary rates on your return. However, property owners will be fully liable under this ownership structure, so it’s important to establish a full insurance policy that will cover your property. You’ll also want insurance if you enter a formal general partnership, which sets up an agreement between partners that should be prepared by an attorney. This kind of partnership formalizes the relationship and is geared to solve problems before they arise.
Finally, a formal limited partnership includes a general partner that has unlimited liability while the limited partner’s liability only covers the amount invested in the owner occupied commercial real estate. The general partner, typically a corporate entity, will have to file an 1120 tax form to report the income it garners from the property. On the plus side, this partnership does not require income tax payments. Instead, each partner’s income or loss from the property is taxed at ordinary rates on the partners’ return. Once you’re familiar with the options, you’ll be able to set up a structure for your real estate that will work best for your needs.