Why Business Property is Important to Your Business

Tax Benefits from Buying Business Property

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Every business owns property. Even the smallest business has property in the form of a computer/laptop, probably a desk, maybe filing cabinets and sometimes a business vehicle. Learn more about business property, how it affects the value of your business and your business taxes, and how to keep records on business property. 

Key Takeaways

  • There are several types of business property: real property, personal property, and listed property.
  • Selling business property will have tax implications, which will be affected by whether you're selling at a gain or a loss.
  • When you buy business property, there are a number of tax deductions you may be able to take, including for mortgage interest, depreciation, and expenses for use.
  • Keep good records of all business property you buy, hold, and sell to make tax time easier and to smooth future property transactions.

Types of Business Property

Business property comes in several different types.

Real Property

Real property, also called real estate, is property that includes land and buildings, and anything affixed to the land. For a business, real property would include warehouses, factories, offices, and other buildings owned by the business. Real property only includes those structures that are affixed to the land, not those which can be removed, such as equipment.

Real property may also be determined to include:

  • Whatever is beneath the surface of the land, such as minerals, natural gas, and oil
  • Rights to the use of property
  • Leasehold improvements (improvements to the property), since these improvements cannot be removed.

Personal Property

Personal property is any property not attached to the land or to structures on real estate. In other words, it's movable. Some examples of personal property owned by a business are equipment, furniture and fixtures, and vehicles.

Note

What the IRS calls "property" for tax purposes, your CPA calls "assets" for accounting purposes. Both are general terms for things of value owned by your company.

Listed Property

Listed property is a specific type of personal property of a business that comes under increased scrutiny by the IRS. Property of this type may be used for either business or personal reasons, so the IRS more carefully monitors deductions for payments for this type of property and for deductions for use of this type of property. Included in listed property are business vehicles, computers, and other electronics.

How Business Property Affects Business Value

Business property is shown on the balance sheet of a business, as business assets. Real property is shown first, then personal property. 

Accumulated depreciation on personal property (real property is not depreciated) is shown on the asset side of the balance sheet, so the net value of the specific property is shown. 

Selling Business Property

Because the sale of business property affects income taxes and real estate taxes, the sale of business property must be recorded and included on your business tax return.

IRS Form 4797, Sale of Business Property, is used to record:

  • The sale or trade of property used in a business for at least a year
  • Involuntary conversion of property held over a year
  • Ordinary gains and losses on business property
  • Gain from the disposition (sale) of specific types of business property
  • Recapture of property under Sections 179 and 280F(b)(2) when business use drops to 50% or less

The sale of business property may result in a short-term or long-term capital gain or loss

How Business Property Affects Business Taxes

When your business owns property, there are several ways it will affect your taxes.

Property Taxes by Localities

If your business owns real property (land and buildings), you must pay property tax on this property. Just as individuals must pay property tax on the assessed value of their homes, businesses pay property tax on the assessed value of their real estate.

Note

If the real estate is sold, the tax for the year is owed by both the previous and new owners, based on how much of the year each owned the property.

Property taxes are assessed by local entities—towns, cities, counties, villages, and the like—for local purposes, such as schools, roads, or improvements in infrastructure.

Each state coordinates and oversees property taxes in all localities. Three types of county officials are involved (with different titles in each location):

  • Property appraisers establish the value of your property
  • Tax collectors send tax bills, collect payments, and approve deferrals and exemptions
  • A value adjustment board hears and rules on challenges to a property's assessment, classification, or exemptions

Depreciation on Business Property

The most important tax benefit to buying business property is that you can take a depreciation expense on long-term business property, like equipment, vehicles, machinery, computers, and furniture. The federal tax laws give incentives to businesses for buying property, in the form of accelerated depreciation.

This depreciation allows you to take all or part of the expense of buying the property during the first year. The two types of accelerated depreciation are Section 179 expenses and bonus depreciation. The amounts you can deduct each year can change, as do the requirements, so check with your tax professional before you make any buying decisions.

Depreciation on listed property may need to be taken using the alternative depreciation method. This method requires an increase in the number of years over which a property is depreciated, decreasing the annual deduction.

Expenses for Use of Business Property

Expenses for use of personal property (such as business driving expenses) are legitimate deductible business expenses, as long as you can show that these expenses are truly business-related. 

Interest expenses on the sale of business property are also included in your business tax return.

Keeping Records on Business Property

It's important to keep excellent records on the purchase of all types of business property, as well as records on mortgages, liabilities, and expenses associated with the purchase and maintenance of all types of property. Proper records help you document your expenses and provide evidence to the IRS in the event of an audit. They are also useful if (or when) you sell the property.

Business software can help you maintain good records. The IRS recommends keeping your business property records until the period of limitations expires for the year you sell the property.

Frequently Asked Questions (FAQs)

What are the advantages and disadvantages of buying business property?

Buying business property allows you to take depreciation on the purchase. And if you buy real estate, you may also benefit from appreciation as the value of the property rises in the future. Owning business real estate also gives you more control over the cost of office or warehouse space than you would have by leasing or renting it. On the down side, you'll owe taxes on the business property, depending on what type of property it is: real property, personal property, or listed property.

What are the tax benefits of buying business property?

When you buy business real property, you can benefit from a number of tax benefits such as deductions, including the interest expense on your mortgage as well as depreciation expense. You may also benefit from other tax deductions, such as write-offs for improvements. And when it comes time to sell the property later, the equity you've gained can be taxed at the capital gains rate rather than as ordinary income, which is often taxed at a much higher rate.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Like-Kind Exchanges Now Limited to Real Property."

  2. IRS. "Rents from Personal Property, "Mixed Leases," and the Rental Exclusion from UBTI."

  3. IRS. "Instructions for Form 4562 Depreciation and Amortization (Including Information on Listed Property")."

  4. IRS. "About Form 4797, Sales of Business Property."

  5. IRS. "How Long Should I Keep Records?"

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