Strategy: Consider a sale/leaseback arrangement, in which the company sells the building to you and then leases it back from you. This can be a win/win situation for both you and the company.
In the case outlined above, the company could sell the building to you for $2 million. (You might borrow some or all of funds to finance the buy.) Then, the company could lease the building from you for a fair rate based on the property’s fair-market value.
Even after paying tax on the gain, your company will have the necessary cash for its expansion. Moreover, the company will have large lease payments that it can deduct, instead of owning a building that no longer yields depreciation deductions.
Your personal gain: You’ll receive lease income from the company. If you’ve already retired — or you’re about to — this will allow you to receive income during retirement without giving up your controlling stock interest in the company.
If you’re no longer active in the business, the income will qualify as passive income that you can offset with passive losses from real estate or other investments.
In any event, you’ll be able to start a new based on the amount that you paid for the building. These depreciation deductions can offset the income you’ll receive in the form of lease payments.
The company’s gain: After the sale to you, any future appreciation is off the company’s books. If you sell the building down the road, you’ll probably owe 25 percent on the depreciation recapture and 15 percent on the long-term capital gain. That’s considerably lower than the 34 percent corporate tax rate your company would likely have to pay.
Finally, the cash will end up in your pocket, not your company’s. So, you can use it without taking taxable dividends from the company.
Tip: The IRS often scrutinizes these sale/leaseback deals (see box), which come fraught with several technical intricacies. So, have your tax pro guide the way.