After recently reviewing several applications for real estate purchase, I discovered that it did not make sense for two of our clients to purchase their commercial real estate at this time. This was slightly painful, considering that we actually earn money by financing business purchases.
I personally believe it only makes sense to own property when you can generate income by doing so. Unless you are a commercial real estate investor, your property is not an active income generator; your business activities (getting and keeping customers) are your active income generator!
Commercial property is just another business tool. And, as with all business tools, you should conduct an careful cost/benefit analysis before investing your hard earned cash. For this reason there are more medical clinics, wholesale companies, restaurants and tech firms opting to lease instead of purchase the property in which they conduct business.
CALL YOUR TAX PROFESSIONAL FOR HELP
Far too many business owners only think about taxes once a year. This is one the biggest mistakes an entrepreneur can make during the life of his business.
If you are considering purchasing the property that you currently rent, or another property you have your eye on, here’s the right way to decide: Schedule a meeting with your accountant and pay for 2 mock tax comparisons; 1 that shows what your tax bill would be if you keep renting your commercial space; the other showing what your tax bill would be if you purchase the property. Then ask her to stretch it out over a 5-7 year period. You’ll have to make certain assumptions; it can’t be exact since nobody knows what you will earn each year for the next 5-7 years but don’t worry, your tax professional will know how to forecast each scenario.
Once it’s done you can see in black and white if it makes sense to buy that commercial property, or keep renting and invest the difference in your business or retirement plan.
Monthly rent payments on office, warehouse, manufacturing facility, etc. are fully tax deductible. When purchasing property certain principal payments, acquisition costs and fees are not tax deductible, so make sure you are crystal clear on what the real, after-tax costs and benefits will be.
Similar to buying a residential property, the real economic benefit is usually enjoyed only when the property is sold; and that presupposes that you can sell for an attractive ‘after-tax’ profit. Your tax adviser will have software that will help you make the best decision based on your unique situation and your business exit strategy.