Buying an investment property - is it a business expense?

27 Replies

My unrelated personal business has taken off and I may be looking at making $500k this year. I own no real estate. I've never made this much money or even close. I need to get rid of some of this cash so I'm not paying cray cray taxes.

Can I purchase an investment property, like a small apartment complex, and do it through my business, using the purchase price as a business expense?

So, make 500k, buy 400k apartment complex, only pay taxes on 100k.

My tax person is saying no. Bummer.

If not, other advice?

@Emily T.   In your scenario, the $400,000 price paid for the Apartment would be a capital expense, which is depreciated over 27.5 years, and NOT a business expense that is fully deductible on this year's tax return.

@Emily T. said (if you buy residential or small multi-family).

There are, however, creative ways to shelter income if you were to buy real estate with your earnings. For instance, you can buy a strip mall and your business can lease a spot in the strip mall. Lease expenses will be deductible to your business and income to the strip mall. If done correctly, your strip mall will be able to shelter the majority of the income it receives, thereby limiting your overall tax liability. Of course this is a very basic example and one of many options available to you.

Generally, you will want to keep your business and real estate in separate entities. You wouldn't want your business to expose your real estate to liability and vice versa. Make sure the professionals you are seeking advice from have your best interest in mind and are capable of providing the level of service you need.

Buying commercial property can be depreciated using MACRS instead of straight line, meaning you can depreciate a large chunk of the property right away.

Think things like solar energy equipment can be depreciated by MACRS as well.

Not an expert on this though, would recommend verifying everything with a CPA.

It sounds like you will be taking a tax hit any which way. 

At this point you may want to think about investing the non taxed funds and try to regrow what Uncle Sam took.

Congrats first off, @Emily T. .  It's always a better problem to solve than the other way around.

I assume you mean 2015's projected return, so you still have 7 months (+10 months max) before you finalize your decisions, so quite some time.

You can indeed buy houses to offset some expenses.  Certain expenses are immediately deductible, some are not just most said.

Talk to your accountant to look for potential ideas first.  I have a feeling it's a combination of real estate and other asset classes.

Originally posted by @Frank Jiang :

Buying commercial property can be depreciated using MACRS instead of straight line, meaning you can depreciate a large chunk of the property right away.

Think things like solar energy equipment can be depreciated by MACRS as well.

Not an expert on this though, would recommend verifying everything with a CPA.

 I have never heard of depreciating property via an accelerated method like MACRS.  Often what happens in commercial property is that there is sometimes a lot of equipment that comes with the property such as specialized security systems, office cubicle setups and furniture and some other types of things like that.  So if you designate part of your purchase price as being specifically for those types of equipment, you can depreciate that stuff under MACRS or even section 179 (depending on the structure of the deal).  But the real estate itself is not eligible.

@Brandon Hall - have you ever heard of real estate being eligible for MACRS?  It'd be a new one on me!

@Emily T.

what a terrific problem to have! Though it won't help a lot, if you have children you can gift part of that money to them. You may get the write off and they might have to pay little if any tax on it. That won't solve your entire "problem". Buying depreciable real estate before the year end will, as others have stated, help some. You need good advice from a tax specialist as well as possibly an attorney and maybe a great Realtor (if you want to pursue RE investment as part of your strategy).

@Che Chiu Wong Care to elaborate on your statement: "You can indeed buy houses to offset some expenses."

@Frank Jiang @Linda Weygant You cannot use MACRS for the actual building as Frank seems to be thinking, however you can use cost segregation to identify property that can then be depreciated using MACRS accelerated methods. Things like appliances, carpeting, landscaping, etc. The building itself can only use straight line.

@Wayne Brooks I've always enjoyed reading your posts, however you may have a typo and just to clarify for the OP, commercial property is 39 years straight line. 

@John Thedford you cannot deduct (aka write-off) gifts given to children (or anyone) on your tax return. You CAN deduct business gifts, however you are limited to $25 per person, so it becomes a moot point.

Good discussion so far!

@Brandon Hall

interesting! Has something changed or am I misinformed? It was my understanding that a parent may gift money to their child and get a writeoff. Where am I wrong?

Originally posted by :

@Frank Jiang @Linda Weygant You cannot use MACRS for the actual building as Frank seems to be thinking, however you can use cost segregation to identify property that can then be depreciated using MACRS accelerated methods. Things like appliances, carpeting, landscaping, etc. The building itself can only use straight line.

Thanks for the correction!

So getting back to the OP's question, to best lower taxes on a potentially one-time windfall, the goal would be to acquire a business with a larger proportion of tax-advantaged assets like equipment over real property.  Maybe something like a farm?

Farming is one of the VERY best ways to turn $500K into $50K.  Heartbreaking as well. 

You can buy businesses with built in tax losses and there are brokers out there that specialize in it.  But now you've got the headache of running a business that you may not know anything about.

I would suggest the OP talk to a tax attorney (which will, coincidentally enough eat up some of those profits) to discuss a strategy that can be tailor made for her specific situation. 

@John Thedford As far as I know, you've never been able to deduct gifts (provided they are not business gifts). 

There are ways to provide for your dependents and deduct the amount, like 529 plans (state deduction only). You can also deduct qualifying dependent care expenses. But "usually" gifts are not deductible. That doesn't mean gifts are not a viable way to transfer wealth. You can transfer $14k per year ($28k if married) to every person in the world and not limit your lifetime gift tax exclusion ($5.43MM). The limit is per person, so if you have three kids, you can transfer $42k ($84k if married) in total and not have to file a gift tax return and decrease your lifetime exclusion. 

If you want to transfer wealth and avoid decreasing your lifetime gift exclusion, one of the best things to do is to hire your children in your business. The expenses will be tax deductible for your business. @Linda Weygant can probably provide more insight here.

Never invest in anything solely for the tax benefits, @Emily T. , unless it also makes economic sense. Buying a building could be a great long-term investment, so long as it makes a profit over time.

We don't know the nature of your business, but if you and your husband are the only employees (and there are some ways around this), you can shelter $106k together in a solo 401k plan, depending upon your age. Check out the IRS guidelines here. (Watch, this mention will bring in all the solo 401k providers to this thread.)

Originally posted by @Brandon Hall

If you want to transfer wealth and avoid decreasing your lifetime gift exclusion, one of the best things to do is to hire your children in your business. The expenses will be tax deductible for your business. @Linda Weygant can probably provide more insight here.

The OP has already indicated that she doesn't have kids, but yes - this is one of my favorite totally legit, 100% audit proof techniques for reducing your taxes and getting some retirement funds set up for your kids as well.

For 2015, you could pay your children who are able to work a salary of up to $11,700. Your child then contributes $5500 to a Traditional IRA, leaving $6,200 in income. They then get to deduct $6200 as their standard deduction, leaving $0 taxable income and $0 taxes paid. Their salary is a business deduction for you.

The wages are subject to FICA, but are exempt from FUTA.  They may also be exempt from SUTA, but that is a state by state case.

Your child has to qualify as your dependent and they must be capable of working.  For example, you can't hire your toddler, but your 6 year old may be capable of emptying the office trash, wiping down monitors, keyboards and desk surfaces.  My 8 year old liked to stuff invoices in envelopes, lick them and put stamps on.  Your teenage may be able to answer phones, vacuum rugs, wash windows or whatever.  You get the added benefit of teaching valuable work ethic!

If the business is family owned and operated, you do not run afoul of child labor laws by hiring under aged children.  Although you can run afoul of those laws by working the child too many hours, not giving sufficient breaks, giving them dangerous work, etc.

I'm curious to know more about why the real estate investment couldn't be treated as a business expense?

Presumably if you were in the business of real estate investment, the purchase of a property would be a business expense?

@Kalen Jordan the purchase of a capital asset is never a currently deductible business expense unless you are utilizing Section 179, which real estate is specifically excluded from.

The logic is: you are purchasing an asset that will provide you value over a number of years, so you must recover your cost over a number of years rather than all upfront.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here