What Happens to Your Business Taxes When You Buy Real Estate?

Buying the building your business operates from feels like a straightforward decision. You are tired of paying rent to someone else, and you want the equity to build for your own company instead of a landlord. But the tax picture changes the moment you own the real estate, and most business owners do not find that out until the purchase is already under contract.

The First Decision: Who Should Own the Building

Most of the time, the operating business should not be the one holding title to the real estate. A separate entity, commonly an LLC, holds the property and leases it back to the operating company. This separation protects the real estate from business liabilities, and it protects the business from anything tied to the property.

• The operating company pays rent to the real estate entity, which is a deductible expense for the business
• The real estate entity reports that rental income, offset by depreciation, interest, and property expenses
• Ownership percentages in the two entities do not have to match, which matters when partners have different long term goals for the property versus the business

Depreciation Changes Everything

Commercial real estate is depreciated over 39 years using straight line depreciation. That is a long recovery period, and on its own it does not create much of a deduction in the early years compared to the purchase price.

This is where a cost segregation study becomes worth considering. A cost segregation study breaks the purchase price into components, some of which qualify for much shorter recovery periods, typically 5, 7, or 15 years, rather than 39. Items like certain electrical and plumbing work tied to specific equipment, parking lot paving, landscaping, and interior finishes can often be reclassified this way.

Under the current bonus depreciation rules, property with a recovery period of 20 years or less can qualify for 100 percent bonus depreciation in the year it is placed in service. That means the components identified in a cost segregation study can potentially be deducted in full immediately, rather than depreciated slowly alongside the building shell.

Financing and What Your Bank Will Want

Buying real estate almost always means a commercial mortgage, and the lender’s requirements will shape parts of the transaction beyond just the interest rate.

• Lenders typically want financial statements for both the operating company and the new real estate entity, and often for a period going back two to three years
• A personal guarantee from the owner is standard for a business real estate purchase, even when the entity itself is the borrower
• Loan covenants may require the operating company to maintain certain financial ratios, which is another reason the lease terms between your two entities need to be set at a fair market rate rather than an arbitrary number

Property Tax and Local Considerations in Massachusetts

Massachusetts assesses commercial property tax at the municipal level, and rates vary meaningfully from one town to the next. Before you close, it is worth confirming the current assessed value and mill rate for the specific property, since that number affects your ongoing carrying cost and should be part of your cash flow projections, not a surprise after your first tax bill.

What Changes If You Are Selling a Property Instead of Buying

If this purchase is tied to selling a different property, a 1031 exchange may allow you to defer the capital gains tax on the sale by rolling the proceeds into the new purchase. The rules around timing and how the funds are held during the exchange are strict, and this needs to be set up before the sale closes, not after.

What Happens Down the Road, When You Eventually Sell

It is worth thinking about the exit even while you are still closing on the purchase. All of the depreciation you claim over the years you own the property, including any amounts accelerated through bonus depreciation or a cost segregation study, is generally subject to depreciation recapture when you sell. That portion of the gain is taxed differently than the rest of the sale proceeds.

This does not mean accelerated depreciation is a bad idea. It usually still makes sense, since a deduction today is generally worth more than the same deduction spread over decades. But it is a planning conversation, not an afterthought, and it belongs on the table well before you list the property.

Common Mistakes We See

• Setting the lease rate between the two entities too low or too high, which can create issues if either entity is ever reviewed
• Skipping a cost segregation study on the assumption it is only worthwhile for very large purchases
• Not involving your CPA until after the purchase and sale agreement is signed, when several of these decisions are easier to make before you are under contract

The Right Time to Loop In Your CPA

The best point to bring us in is while you are still evaluating properties, not after you have signed a purchase and sale agreement. Entity structure, financing terms, and whether a cost segregation study makes sense are all easier to plan for before closing than to unwind afterward.

If you are also preparing to bring updated financials to your bank as part of this purchase, our financial statement review services page walks through what lenders typically expect.

Thinking about buying the building your business operates from? Let’s talk through the structure before you sign anything.

Our tax planning services cover exactly this kind of decision, from entity structure through the depreciation strategy after closing.

Ready to plan your real estate purchase the right way?

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