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We would like to purchase a business property to expand my…

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We would like to...

We would like to purchase a business property to expand my current business to a second location. Should we purchase it in my name or the business name. Also I can borrow the money from a relative and use some of my own money or get a loan. Which one would be better. We have a rental property we are selling which we are going to sell in 6 mo to a year and we can pay the relative back and own it free in clear.

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

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Submitted: 2 months ago.Category: Tax
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4/1/2018
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 2 months ago
Cole Parker
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Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 2 months ago

Ok... first... it's best to purchase the second location using the business. Is your current business currently formed as an LLC?

Second, when you borrow money it's up to you how you'd like to finance it or pay for it. Typically, relatives charge a lower interest rate (if they charge one). So you can potential save interest, plus if you don't use a bank then it's not reported to any of the credit bureaus and therefore not counted for or against you.

So it's really up to you on how you'd like to pay for the second location. If you can sell a property and then repay the debt to your relative, then you may consider that option.

Also consider that you may owe income tax on the rental property you plan to sell. If you time it correctly, the sale of your rental property, you could benefit from a Sec 1031 exchange and defer paying income tax on the rental property.

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Customer reply replied 2 months ago
How does the second 1031 exchange work? Also what is the best way to deduct the expensive of purchasing the new property?
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 2 months ago

To do a Sec 1031 exchange, you'll need what's called an accommodater (i.e., title/escrow company) to facilitate this transaction. What basically happens is a like-kind exchange for property. For example, if you sale a piece of land and then within 45 days identify another piece of land you wish to purchase and then close within 180 days, you will have deferred in gain subject to income tax until you later sale that land for cash.

The trick is though, you need a 3rd party accommodater to make this happen cause you're not supposed to touch any of the funds during this transaction.

As far as deducting the new property, than really depends on what you purchased. Some of it will probably be depreciated and some you can take an immediate deduction-- it all depends on what you have purchased.

Does this make sense... somewhat?

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Customer reply replied 2 months ago
We probably can't do the exchange as we will close on the new property in 30 to 45 days and can't sell the rental until the fall because we have renters in there until September first. The property we are purchasing is for a second location of our business and we would like to know about how to deduct the expenses.
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 2 months ago

What are you purchasing with the second property?

  • Building?
  • Land?
  • Equipment of any sort?
  • Furniture and/or fixtures?

If you able to tell me this, then I can better guide you to what is deductible...

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Customer reply replied 2 months ago
It's an existing building. We will have to do some build out and then furnish it.
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 2 months ago

The purchase price of the build is what you'll be able depreciate but over 39 years for commercial-use (as of 2017).

The best way to determine the amount you'll be able to expense on an annual basis is to take the cost of the building and divide it by 39 years. That's your expense for the next 39 years.

The build-out or add-on, will also more than likely fall under the 39 year rule. The furnishings and other little things can more than likely be expensed the same year using depreciation code section 179.

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Customer reply replied 2 months ago
Is there a way to lease the business from the first business (or from me if I buy it under my name instead of under the businesses name) if we made the second business a separate entity? It will be a second location but because it is in a different town it will have to have a different name. I have heard of people doing that. Would that allow me to deduct monthly rental payments as well as the depreciation of the building you described above?
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 2 months ago

Yes, you can certainly do this. The second company would have rental income from the first company plus the second company would also have deprecation and other expenses.

To make it legal and pass IRS audit, if ever that happened, you'd have to have lease document in place stating the terms of the lease.

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