Should Business Owners Lease or Purchase Their Building?

As a small business owner, you may either rent space in which you run your business, or own a building in which you run your business. After years of hard work and effort, your business has grown and you are running out of space. What should you do?

You can always rent a larger space or a larger building. Doing this allows your business to write off the cost of rent as a business expense. Once you find a building, should your company buy the building?

A good solution is to form a limited liability company which is owned by the business owner and his family members. This entity then arranges for a purchase and financing to acquire title to the building. A lease is entered into between the family-owned limited liability company and the business.

There is no change in the rent cost to the continuing business. However, rather than paying the money to a stranger, you “invest” the rent payments in acquiring title to your building. After 10 or 15 years, your family real estate limited liability company owns the real estate outright.

If your business outgrows the building, you can do an exchange for a larger building using Internal Revenue Code Section 1031, and defer payment of any capital gain realized on the sale of the smaller building. See the accompanying article on Tax Free Exchanges.