building a garage for the business

[huggytree]

Im building a 2 story small barn for my business.

Ive had a couple of people say 'pay for the garage from your business checking account'

my accountant says pay out of my personal because the deductable is not worth taking.

39 years is what the deduction gets divided out to and when you sell the house you will then have to pay taxes on whatever increase in value the garage gives you...so basically i will pay back in taxes when i sell the house everything i got in tax savings by deducting.

he's a very conservative guy who wont push the tax rules....he never seems to have any advice on how to hide/save my money from high taxes...

[orion_joel]

I think the argument will boil down to how long are you planning to stay living where you are living. If you cannot see yourself moving in the short to medium term. Then why not take advantage of any tax benefit you can on your business.

I am no accountant, but to my logic, if you build the barn you are going to improve the value of your property no matter if you or your business pays for it. If your business pays for it you get some tax break along the way and maybe you have to pay more tax when you sell, but if you pay for it yourself, you would still have to pay the additional tax when you sell, without having got the tax break along the way.

The other issue that you may have might come down to insurance. If you build the barn from personal funds and then start using it for business, you would want to make sure the insurance is set up properly.

Anyway maybe Evan, may comment on this thread he would probably have a good point on the topic.

[Evan]

As I recall, you have an S-Corp, huggytree.

Commercial real estate is depreciated over 39 years. It is 27-1/2 years for residential real estate. I'm not too sure what costs you are talking about, but 39 years will provide very little depreciation for you. $100,000 on 39 years is $2,564 a year. Then depending on your tax bracket, which we will assume 35% (highest marginal rate), that is tax savings of $897 per year. This sounds good, right?

Well, yes, until you sell it. Let's say after 10 years, you sell the property. You must now recapture all of the depreciation you took over those past 10 years. That means $25,640 must be included as ordinary income at that point, resulting in taxes of $8,974. You also need to figure out what the FMV of the barn is to determine whether you also have a capital gain as well, which would be taxed at the more favorable tax rates.

So what is the bottom-line? When you sell your personal residence, a gain of up to $500,000 is tax-free. When you claimed that barn as business property, you are making it part of the business and now subjecting it to taxation when it could have just added value to your property without any tax consequences.

I also want to advise you against placing real estate in an S-Corporation. It is always a bad idea. Especially if the sale may cause you to lose the S election (could be possible with other factors) OR if you lose it while you own the property in the name of the corporation. Most accountants would advise against putting any appreciating asset into an S-Corp.

My advice is to build it to add to the value and basis in your current property and hope that the value appreciates. If your gain is $500,000 (because you're married), you will be quite happy when the time comes.