Do I Pay Capital Gains Taxes on a House That My Company Sells Back to Me?

When you buy a house with a business like an LLC, your company might end up selling the house back to you. If that happens, what sort of taxes will you owe on the sale?

In most cases, when you sell a house, you owe long-term capital gains tax on the profit that you make from the sale (minus any exclusions you qualify for) if you have owned it for more than a year. If you owned the house for less than a year, it is a short-term capital gain and is taxed at your ordinary federal income tax rate.

But what if your business purchased the house, and then your business sells it to you as a private owner? You owned the business, and the business owned the home. Now, you own the home outright. Does that mean you don't owe capital gains tax?

The answer to this question depends on the type of legal entity your business is operated through and how it is organized. For example, your business might be an LLC (limited liability company), or it could be a corporation or partnership. Each one of these impacts the sale, and the tax you owe, in a different way.

Learn how the type of business you have can impact a private real estate transaction between you and that company.

C Corporation

If your business is a C Corporation, there would be no long-term capital gains tax on the sale, but there would be regular corporate income tax if a profit is realized on the house.

This is because C corporations do not have any preferential capital gains tax rates available to them. Generally, all of the income recognized by a business operating through a traditional C corporation is taxed at the corporate income tax rate. This is a flat 21%. Any asset sale by a corporation to a shareholder would be taxed if there were a gain on the sale. This includes a real estate sale, such as a house.

The sales price will also need to represent what is called an arm's length price, or what an independent third party would pay for the home. This means you can't charge yourself $100 for the house in order to avoid paying taxes on the sale. If the Internal Revenue Service (IRS) determines that the sale price was not at an arm's length rate, then you could find yourself in legal or financial difficulties.

S Corporation

The sale of a house by an S Corporation to one of its shareholders would be treated as a long-term capital gain if the corporation owned the house for more than one year. An S corporation generally does not pay any income tax. All items of income and loss are passed through to the individual shareholders. So this gain would be passed through to the respective shareholder who must report it on their individual income tax return. 

This doesn't always mean that the capital gain is simply the difference between what the business paid and what the shareholder paid. There may be other tax issues to consider in calculating what the gain was. For example, if the house was used for business purposes, you would also need to account for depreciation recapture. Talk to a tax accountant to make sure you are properly reporting the sale on both your business and personal taxes.

Single-Member LLC and Sole Proprietorship

Single-member LLCs and sole proprietorships are taxed the same way at the federal level. If the house were used for business purposes and was owned by an LLC (that is, the title was in the name of the LLC) then the gain on the sale would have to be reported by the owner of the LLC on their individual income tax return. If the LLC owned the house for more than one year, the owner would treat the gain as a long-term capital gain. If the LLC owned it for less than a year, then it would be taxed at the owner's ordinary income tax rate.

With respect to a sole proprietorship, the house can only be titled in the name of the individual who operates the sole proprietorship. Since the title wouldn't change, there is technically no sale and no capital gains issue until the individual sells the house to an independent third party.

For both a single-member LLC and a sole proprietorship, depreciation recapture rules would apply if the business used the house.

LLC With Multiple Owners, Taxed as a Partnership

The rules that apply to a corporation would be identical in this scenario: any long-term capital gain would be taxed only within the LLC.

Partnerships are similar to S corporations in that the individual items of income and loss are not taxed within the partnership, but are passed through to the individual partners and taxed on their individual income tax returns. Thus, any sale of a house by the partnership would be taxable to the individual partners, and not the partnership. If the partnership owned the house for more than one year, then the gain would be eligible for the long-term capital gains tax rate.

How to Buy a House Through a Business

Buying a home through your business can make more sense than buying it as an individual, depending on your type of business. For example, you might consider buying a house through your business if you:

• Are a real estate investor who already buys many properties through your business
• Run your business out of your home, making the cost of your home a business expense
• Have been in business for many years and have strong borrowing history, making it easier to get financing
  

Once you have qualified for a mortgage and gone forward with the sale, the house will need to be titled in the name of the business. This is another reason it is important for your business to be fully registered, licensed, and in operation before a real estate purchase.

Once your company owns the home and uses it for business purposes, you can deduct many home expenses as business expenses. If you also live there, however, you may not be able to fully deduct each expense. Whether you can deduct all or some of your home expenses, including real estate taxes, will depend on whether it (or portions of it) is used exclusively for business purposes.

Keep careful records of any repairs, maintenance, or renovations, as well as where and how you work within your home. Then, consult a tax professional to ensure that everything is reported correctly on both your business and personal taxes.

Advantages and Disadvantages of Buying a House Through a Business

Pros

• Privacy: If you purchase a home through your business, your name won't appear on public records of the sale. This gives you a higher degree of privacy after the sale goes through.
  
• Tax write-off: You may be able to write off the purchase of a house as a business expense. And since it will likely take your business several years to pay off a mortgage, you may be able to take tax write-offs for many years.
• Protection from foreclosure: If you file for bankruptcy as an individual, a house owned by your LLC or other business will be protected from the foreclosure process.
• No personal liability: If someone is injured at a home you own, you may be personally liable. But if the house is held in the name of your business, your personal assets aren't liable in the case of a lawsuit.

Cons

• Business liability: While your personal assets are protected, your business assets could be at risk in the event of a lawsuit. You'll need to consider whether it's more important to protect your personal or business property from liability.
• Cost: Setting up, registering, and managing a business can cost a significant amount of money. Once your business exists, some states, such as California, require that LLCs pay a minimum annual tax or fee.
• Eligible for fewer loans: If you are buying a house with an LLC or other business, you won't be eligible for a number of residential loans. For example, whether or not you can get a Federal Housing Administration (FHA) loan will depend on the structure of your business and how the property will be titled.
• No capital gains exemption: When you sell a primary residence as a single filer, the first $250,000 of profit is exempt from capital gains tax. For a married couple filing jointly, this exemption rises to $500,000. You forfeit this exemption if you purchase a house through an LLC or other business entity.

The Bottom Line

If you purchase a house from a business that you own, the treatment of capital gains tax will depend on the structure of that business. In some cases, there is no capital gains treatment, and profits from the sale are taxed at the corporate tax rate. In other cases, the gain is reported by an individual shareholder.

There are pros and cons to buying a home with an LLC or other business, such as limiting personal liability but losing the capital gains exemption. Before you purchase a property through your business, or purchase a property from your business, consult a tax professional to determine the best way to handle your assets and minimize your tax liability.