Appraised Value

by M. Will Fischtein,

How you treat business property from an operational standpoint will limit liability and maximize capital

Do you own real estate as part of your company’s structure? You should consider how to treat that real estate from an operational standpoint. No matter the size of your operation, having a solid grasp of how to deal with your real estate assets will, in the long term, add profitability and wealth stability. Ask these questions to

help your decision-making.

Is the real estate a key part of your operation?

If so, do you own it personally or does it belong to the company or a separate legal entity?

If the real estate is in your name, think about transferring ownership to limit personal liability for anything that happens on the property. It used to be that you could offset your income from the depreciation of the property but that is no longer the case.

If the real estate is in the firm’s name, be aware your business could be held liable for anything bad that happens on the premises.

Take, for example, an entrepreneur who owns a hotel and the land it occupies. The hotel’s business operations are managed by one company and the land ownership by another. The owner’s rationale for keeping them separate is based on a desire to shield the real estate, and limit the impact and liability of potential lawsuits. To make this division even stronger, the owner has the hotel pay rent to the company that owns the real estate.

Are you dependent on a specific physical location?

If you depend on a specific location—a store or restaurant that needs to be on a major thoroughfare in order to attract customers—and you’re located in that real estate, it makes more sense for the business to own the property. In the event you decided to sell, you’d then be able to use your lifetime capital gains exemption.

If not, consider researching real estate values in other locations to determine whether it would be beneficial to sell your current property and move to a less expensive location. In some cases, such moves can even place the business in a lower tax jurisdiction.

Are you a multiple location operation, with your real estate holdings part of the profitability and success?

If you use your real estate for daily operations but your properties, such as a warehouse or office building with rented retail space, also generate rental income, consider hiring a professional property manager.

If your real estate assets are run professionally, and the properties are well maintained, fully leased and strategically financed—low interest rate, good terms, low discharge fees—this will significantly add to the long-term profitability of your business because it will give you more capital to allocate to other things.

This article originally appeared in the Spring 2011 issue of Canadian Capital.

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