Buying a house is a major event in most people’s lives. Depending upon the line of work you are in, you may be able to buy one through your business as a deductible expense. If your business involves renting out homes to others, flipping homes, remodelling and reselling homes or investing as a long-term capital gains asset, you probably buy and sell many houses through your business. However, it may still be possible to buy real estate through your business for other reasons.
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Determine the use of the house. For real estate to be a legitimate business expense, it must serve a business need. For instance, a hair stylist could buy a house and use it as her salon, cutting her client’s hair in the house and hanging a sign outside. She could not, however, buy two houses, use one for her salon while living in the other, and claim the second house as a business expense.
Use a portion of the house for business. If the majority of the home is in use for business purposes, you may be able to live in the additional portion and claim part of the house as a business expense. The problem with doing this, however, is that you may lose your living quarters if you suffer a business loss, since the business portion of your home is now an unprotected asset.
Buy a house through your business if you have a corporation but lose your personal protection. A corporation exists to separate business expenses from personal expenses, and it will protect your personal expenses if your business incurs debt that you can't pay. All assets you hold in your corporation are subject to seizure and liquidation in order to pay creditors, so the house would fall into that category.
Request that the closing agent for the transaction list your business name as the buyer of the house on the deed. In some states, this means your business name must be on record as a fictitious name through the state. In others, you may simply request that your business name be on the deed. Talk to the closing agent to find out the laws in your area.
Keep detailed records of all incurred expenses associated with your purchase of the house. The government requires that you list and provide evidence for all business purchases, since your accountant will weigh them against your gross business sales or receipts in order to figure your tax liability. Since a house is a big purchase, you may spread out the deduction over a number of years.
Prepare to pay capital gains tax when you resell the house. Although a house used as a personal residence is exempt from capital gains taxes, up to a certain amount, the profit you realise on a house purchased as a business expense is taxable.
Tips and warnings
- If you’re getting started in real-estate investing, be aware that you can roll the profit from an investment property that you are selling into a 1031 tax-deferred exchange and purchase another investment property without paying capital gains taxes, as long as you hold the successive property. Talk to a title-insurance agent about the process.
- Consider hiring a professional accountant if you’re making major purchases through your business. He keeps up on the changing tax laws, and can coach you in making wise business purchases.