John “Pete” J. Roe IIIRoe Taroff Taitz and Portman, LLP
BOHEMIA, NY, February 19, 2013 /24-7PressRelease/
-- After years of hard work and effort, your small business has grown and you are running out of space. You may either purchase a building or rent additional space in which you run your business. What should you do? Buy or lease? It's a question most business owners or executives face at least once in the lifetime of their company. But it's also a question fraught with many factors. To help Long Island business owners and executives make better business real estate
decisions, John J. Roe, III of Roe Taroff Taitz and Portman, LLP, a Long Island Law Firm
, has developed a series of questions and a Business Property Sale & Purchase Checklist.
"As with any business decision, we recommend that you speak with your attorney and accountant," says Mr. Roe. "However, the questions below will offer some guidance and things to think about when making business real estate decisions."
Long-term or short-term usage?
Whether you buy or lease space, you can end up making monthly payments on space that you don't require if you operate a business with seasonal storage needs, for example. In this case, it is probably more cost-effective to rent the space on a month-to-month basis.
Pay yourself rent?
To avoid paying a stranger a monthly rent, you can "invest" the rent payments by acquiring title to your building. A good solution is to form a limited liability company which is owned personally by the business owner and his or her family members. This entity then arranges for a purchase and financing to acquire title to a building. Then a lease is entered into between the family-owned limited liability company and the business. There is no change in the cost of occupancy for the business. However, after 10 or 15 years, your family real estate limited liability company owns the real estate outright.
Looking to expand?
If your business outgrows the building it owns now, consider exchanging it for a larger building using Internal Revenue Code Section 1031, and defer payment of any capital gain realized on the sale of the smaller building. There are three significant benefits to a 1031 tax deferred exchange:
1. It saves the 25% tax on recapture of depreciation.
2. It saves the 3.8% tax on capital gains imposed by the new Affordable Healthcare Act (new as of 1/1/13).
3. It saves the 20% tax on capital gains (up from 15% in 2012).
Are you watching those taxes?
The building you own may have been fully depreciated. If you decide to sell it and buy a larger building, you will be exposed to capital gains taxes. This means that you will not be able to use all of the sales proceeds to buy a larger building.
Do you know to use a QI to purchase your next property?
Once you have decided to sell a property, you need to find a "Replacement Property" which is a "like kind" property. It will replace the "Relinquished Property". You must not receive any of the sales proceeds personally since doing so will trigger the capital gains tax. Instead, you use what is known as a Qualified Intermediary (QI). Your contract of sale is assigned to the QI and the QI receives all of the net sales proceeds. The QI holds those funds until you identify the Replacement Property. Once you do so, that contract of sale is also assigned to the QI. The QI uses the original sales proceeds to buy the Replacement Property and assigns its right to buy the Replacement Property to you. The deed to the Replacement Property is made out to you and you now own the new property having used all of the original proceeds of sale without any reduction by capital gains taxes.
There are strict time frames in which to act. You must identify the Replacement Property within 90 days of closing on the sale of the Relinquished Property and close title on the Replacement Property no later than 180 days from the original sale.
The savings realized through carefully considering these questions can be significant. As a case in point, Roe Taroff Taitz and Portman represented an individual whose building had depreciated to a zero balance. There was a capital gain of about a quarter of a million dollars at the time of the sale of his business. However, the firm was able to structure the transaction so that no capital gain tax was paid. The client was able to construct a new building to his specifications. Once the building was completed and the Certificate of Occupancy issued, the client moved from the smaller building which had been rented to another company in the interim and was to be sold to that company at the end of the interim period and was able to obtain IDA financing for the acquisition of the new property. In the process, Roe Taroff Taitz and Portman saved the client about $70 thousand in capital gain taxes.
Business Property Sale & Purchase Checklist
1. Determine the depreciated value of your building (the "Relinquished Property").
2. Enter into a contract to sell your building.
3. Identify a Qualified Intermediary (QI).
4. Assign your contract to the QI.
5. Identify a Replacement Property and enter into a contract to buy it.
6. Assign this contract to the QI.
7. Close title on both properties on the same day; the QI receives all of the sales proceeds from the sale of the Relinquished Property and uses these to buy the Replacement Property.
8. You pay no capital gains taxes and you carry forward the original cost basis for later capital gains tax purposes.
9. This strategy can be used again at a later date to keep postponing the taxes. In the end, if you own the Replacement Property at the time of your death, it gets a step up in cost basis to the date of your death. If the values are less than the Estate tax exemption amounts there will be no estate taxes and you will have avoided estate taxes and capital gains taxes.
10. CAUTION: There are serious time constraints on the Tax Deferred Exchange, so make sure to contact your attorney and your accountant so you don't run afoul of these deadlines.
John "Pete" J. Roe III
Mr. Roe is a partner with Roe Taroff Taitz & Portman where he assists the firm's clients in estate planning, business and real estate matters. He recently served a two year term as Chairman of the Surrogate's Court Committee of the Suffolk County Bar Association. Mr. Roe holds a bachelors degree from Brown University and received his J.D. from the University of Virginia.
About Roe Taroff Taitz & Portman
Roe Taroff Taitz & Portman, LLP provides a wide variety of legal services to Long Island. Our attorneys have served the residents of Suffolk County for more than two decades. Comprised of attorneys, legal assistants and administrative staff, the firm provides support at various levels of legal expertise. Our resources are available to both businesses and individuals looking for experienced legal representation. The firm's primary areas of concentration include civil litigation, creditor's rights law, trust and estates issues, estate planning, admiralty claims, business counseling and real estate matters. For more information, please call 631-475-4400 or visit http://www.RTTPLaw.com
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