Business Options: Separate Property Ownership for Possible Advantage
A car dealership typically consists of a variety of physical assets such as service department equipment, showroom furnishings and displays, and vehicle inventory. But the largest physical asset for most dealerships is the building and the land it sits on.
Many car dealers choose to separate ownership of the building and real estate from the dealership itself. One of the main benefits of this strategy is that it shields these assets from claims by creditors if your company ever files for bankruptcy, assuming the property isn’t pledged as loan collateral. In addition, the property is better protected against claims that may arise if a customer is injured on your property and sues your business.
The best way to separate the ownership of buildings and real estate from a dealership is to form a distinct entity, such as a limited liability company (LLC) or a limited liability partnership (LLP), to hold legal title to the property. Your dealership will then rent the property from the entity as tenant and landlord.
The tax benefits
This strategy also can result in tax savings for your dealership. For example, if your company is organized as a C corporation and you want to sell buildings and real estate, profits from the sale will be subject to double taxation. If the property is held in a flow-through entity, these profits will only be taxed once.
Also, the rent your dealership pays to the separate entity is a deductible business expense, which can lower your income taxes. And if you co-own the property with your children, the rental income that flows to them may be taxed at a lower rate while also avoiding the net investment income tax of 3.8% if you’re subject to this.
The Tax Cuts and Jobs Act passed last December contains a provision that could affect this strategy. If your dealership deducts floor plan interest in full, you can’t claim bonus depreciation if the buildings and real estate are also owned by the dealership. But if the buildings and real estate are held in a separate legal entity, you may be able to claim bonus depreciation even if you deduct floor plan interest.
Succession and estate planning issues
Using this strategy also can help you transition ownership of your company to one or more key employees, or reward employees for strong performance. By holding buildings and real estate in a separate entity, you can give shares in the company to employees without transferring ownership of the property.
And, retaining title to the property will allow you to collect rent from the new dealership owners. This can be a valuable source of cash flow to help fund your retirement.
You could also realize estate planning benefits. When buildings and real estate are held in a separate legal entity, you can gift dealership interest to your heirs without giving up interest in the property.
Another strategy is to have heirs obtain ownership interest in the real estate. When appreciated property isn’t included as part of your estate when you die, that appreciation will have been passed to your heirs untouched by gift tax rules. This also can simplify the settlement of your estate and reduce costs.
Get expert advice
The details involved in separating the title to your buildings and real estate from your dealership can be complex. Talk to your tax advisor before implementing this strategy.