Sole Proprietor to buy Commercial Property

[taxlady49]

Client is a sole proprietor (insurance agent) and is looking to purchase a building for her agency. She is currently renting office space and is being forced to make a change soon.
She wants to remain a sole proprietor if possible. What options should we look at for the building purchase? Can she rent from herself in order to claim the expense on Sch C?
Any thoughts would be appreciated.

[JohnH]

Llc

Depending upon what state you are in, this may or may not be a good idea, but off the top of my head the first thing I would consider is owning the building in an LLC.

[Bees Knees]

You cannot rent from yourself. IRS Pub 535, page 14 says “rent is any amount you pay for the use of property you do not own.” This rule prevents you from shifting self employment income (net profit on Schedule C) to non-self employment income (net profit on Schedule E).

An LLC is a good vehicle in which to own real estate. However, if it is a single member LLC and no election is made to be taxed as a corporation, then the LLC is disregarded for federal income tax purposes and any rent paid from the Schedule C to the Schedule E business would not be recognized.

I also would NOT have the LLC elect to be taxed as a corporation, as that presents problems down the road in the form of double taxation if the property is sold or the corporation is liquidated.

The LLC can certainly own the building and a Schedule E rental activity can report rental income and expenses from other tenants. However, short of a corporation which I do not advise, there is no way to take a deduction on Schedule C for rent paid to herself on a Schedule E activity.

[taxlady49]

Thanks! BTW we are located in OH

[taxfun]

Insurance agent

One option might be for her to become an s-corp and have the s-corp rent from her LLC.

[LTS]

am i being too simple (minded)? purchase the building and set it up as an asset in the sch c, sole prop. take all expenses, including adequate insurance, and depreciation on the sch c.

[S T]

Commercial Property

Bees provided some good advice.

Since t/p would be using for her business, seems like the easiest would be to purchase in the name of the taxpayer, and then as you said set the building up as an asset (bldg/land value) depreciation deduction on Schedule C.

No rent deduction on Schedule C, only mortage interest and property taxes and depreciation.

Have t/p contact their insurance company to meet the mortgage requirements for fire insurance, etc, and then also procure an umbrella policy for extended liability limits for $1million-$2million, etc.

Sandy

[JJolie]

Bees Knees... Does it make any difference if an outside partner (say, a 1% partner) is added to the LLC and the LLC file as partnership. Can this way Schedule C income be shifted to the Partnership and make it not subject to Self Employment taxes. Thanks in advance.

[Matt Sova]

S-Corp or Sch C

I like the idea of turning the business into an S-Corp, if it makes sense. If not then purchase the building in an LLC. Set up the building as an asset in the Sch C and take all expenses (interest, maint, depr, taxes, etc.) on the Sch C. If at any time you convert the business to an S-Corp the building would then go to Sch E and the corp would rent from the owner.

[Bees Knees]

You can do the same thing with an LLC that has at least 2 members. An LLC is considered a separate entity for federal tax purposes when it has 2 or more members. So, for example, you can have the building owned by the LLC, charge rent for its use by the Schedule C business, and thus reduce SE tax.

The reason I like the LLC over the S corporation, as Matt suggests, is because I don't want payroll issue to complicate things. The S corporation has to pay its people a wage.

Of course, I live in Minnesota where it costs pennies to set up an LLC, and it is not subject to any special annual registration fees like in some states. That could make a difference between setting up the LLC vs. doing it through an S corporation.

[JJolie]

Thanks Bees Knees and Matt Sova.