Separating operating assets from real property

Jim KrendlPowersports dealers should understand the importance of separating dealership assets (inventory, accounts receivable, shop equipment, etc.) from real estate (the dealership building and surrounding land, including parking areas).  Of course, many dealers own only the operating assets and lease the real estate from someone else.  However, if you already own some of the real estate you use for your business, or if you are thinking about buying real estate, remember to keep the two assets separate.

This does not mean that you have to have one person own the operating assets and another person own the real estate. You can own 100 percent of all the equity in both categories, but you should hold them through a corporation, limited liability company or other entity to keep the tax and other legal issues separate at all times. 

There are many advantages to separation of ownership that include the following:

  • Protect the value of one group of assets from the liabilities of the other.
  • Greater flexibility in financing, such as getting a mortgage on the real property and a line of credit on the operating assets.
  • Ease of making personal decisions, such as an estate plan that leaves the operating assets to a son or daughter who is active in the business and the real estate to someone who is not an active participant.
  • Tax planning, such as increasing or decreasing the rent (within reasonable market value limits) that the dealership pays to the owner of the real property.
  • Make an ownership transition easier. For example you might sell the dealership assets to a new operator, while retaining the real property and rental income for yourself or your heirs.

 DISCLAIMER:  This blog is a highly simplified general discussion.  It is not legal advice. Such advice should come solely from qualified legal counsel who understands your situation and who is familiar with all relevant facts, variations in state and local laws that may apply to you, and other matters beyond the scope of this blog.

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