Real Estate

Stretch Out Real Estate Tax Benefits

May 18, 2017
Graham Petersen

Let’s say you own a C corporation that needs to raise some cash and you’re considering the sale of a warehouse that has been depreciated to zero. But the company still uses the warehouse and doesn’t want to lose control of it.

Think about entering into a sale-lease transaction. You buy the warehouse personally and then lease it back to the company.


Your company raises the cash it needs and retains control of the warehouse. In addition, the lease payments are deductible by your company so they generate tax benefits from a property that was no longer providing depreciation deductions. Meanwhile, you get a source of income and can start a new depreciation schedule based on what you paid for the warehouse.The deductions provide a tax shelter for some of your lease income.
This plan may hold particular appeal to you if you are close to retirement because you can get a regular income without giving up equity in the company. When you’re no longer active in the business, the payments will become “passive” income, which could be offset by passive losses from tax-shelter investments. If you eventually sell the property, you’ll probably owe tax of 25 percent on depreciation you’ve taken and a maximum of 15 percent on long-term capital gains from appreciation.

But if your corporation continued to own the warehouse, subsequent appreciation probably would have been taxed at 34 percent. What’s more, any future gains go to you, not to the company, so you can collect cash without having to take a nondeductible dividend from the company.

In order for this deal to work, the property’s useful life must exceed the lease term. All the terms of the transaction — sale price, lease rates, renewal rates, repurchase option — must be at fair market value.

The Bottom Line

You must assume the risk of losing money and have a real chance of making money, in order for the tax benefits to be sustained. As with all complex transactions, consult with your tax advisor to help you structure the deal.