Business Owners often have to make decisions about the offices, warehouses, and other real estate they may use. At some point, you may decide that your company should be a property owner. Whether you buy existing real estate or develop a new property, some strategies can make the venture less costly.

Careful cost allocation
With any real estate investment, raw land is not eligible for depreciation deductions. Thus, it's in your interest to have less of your cost allocated to land and more allocated to building and improvements.

What's more, commercial real estate generally has a 39-year depreciation schedule. However, machinery and equipment and other items not part of the base building can be written off more quickly, perhaps over five or seven years. The costs of carpets, linoleum, and window treatments, for example, can often be depreciated rapidly. The same might be true for appliances and communications systems.

Our office can help you work with a consulting firm that has the engineering expertise, which will be especially helpful in the case of new construction. If tax reduction is a goal, more costs can be allocated to shorter-lived items from the beginning of a project, resulting in accelerated tax deductions.

Even if you are already appreciating your building on a 39-year schedule, it may be possible to file amended returns to claim deductions you could have taken in prior years.

Savvy sale-leaseback
What if your company owns a building that is fully depreciated and therefore not providing much in the way of tax deductions? One strategy would be to buy the building yourself, as the company owner, or have a group of owners form a limited liability company (LLC) to buy the building. Those deductions can offset the income you receive from the lease payments.

What does this accomplish?

• The company will have continued use of the building.

• The company's gain on the sale of the building will be taxable. However, any tax might be reduced by corporate deductions or operating losses, including a net operating loss carryforward.

• The net proceeds, after tax, will be available to the company.

• Going forward, the company will have deductible lease payments to replace the depreciation deductions that no longer will be available.

• You (as well as any other members in an LLC) will have income from the lease payments to pay down the debt incurred to buy the property.

• You will be able to start a new depreciation schedule determined by your cost basis in the building. Those deductions can offset the income you receive from the lease payment.

Retirement revenues
A sale-leaseback may be especially attractive if you're about to retire. Lease payments from the company can provide supplemental retirement income.

Ultimately, you might sell the building to provide even more spending money in retirement. Alternatively, you can hold on to the building and pass it to your heirs, who may get a basis step-up to market value when they inherit.

To qualify for all the benefits listed above, the sale-leaseback must be valid. Among the requirements:

• The property's useful life must exceed the lease term.

• All the terms of the deal -- selling price, lease rate, renewal rates, and any repurchase option - must be at fair market value.

• By the terms of the deal, the property buyers must bear some risk of losing money and must have reasonable expectations to profit from the sale-leaseback.