A:

The answer to this question really depends on the type of legal entity your business is operated through. Businesses may be operated as any of the following legal entities:

Each legal entity has unique tax advantages and disadvantages, depending upon the nature of the business. Let's answer this question, legal entity by legal entity.

C Corporation
There would be no long-term capital gains tax on the sale, but there would be regular corporate income tax on the sale if there were a gain realized on the sale. The reason for this is that C corporations do not have any preferential capital gains tax rates available to them. Generally, all of the income recognized by a business operating through a traditional C corporation is taxed at the corporate income tax rates that range from 15% up to 35%, depending upon the level of taxable income. Any asset sale by a corporation to a shareholder would be taxed if there were a gain on the sale, this includes a house. Furthermore, the sales price must represent what is called an arm's length price. Arm's length means it represents what an independent third party would pay for the home. If the sales price of the home was determined to be not at arm's length by the IRS, then there are a host of distribution-related issues that could apply, and which are beyond the scope of this article.

S Corporation
The sale of a house by an S corporation to one of its shareholders would be treated as a long-term capital gain (if the corporation owned the house for more than one year). This gain would be passed through to the respective shareholders and taxed on their individual income tax returns. An S corporation generally does not pay any income tax. All items of income and loss are passed through to the individual shareholders who must report these income or loss items on their individual income tax returns. There are other issues, such as depreciation recapture if the house were used for a business purpose, but that is beyond the scope of this article.

Single-Member Limited Liability Company ("LLC") and Sole Proprietorship
Single-member LLCs and sole proprietorships are taxed the same way at the federal level. If the house were used for business purposes and was owned by an LLC (title was in the name of the LLC) then the gain on the sale would have to be reported by the owner of the LLC on his or her individual income tax return. If the house were owned more than one year by the LLC then the owner would treat the gain as a long-term capital gain. With respect to a sole proprietorship, the house can only be titled in the name of the individual who operated the sole proprietorship. Since title does not change, there is no sale and no capital gains issue until the individual sells the house to an independent third party. Depreciation recapture rules would apply if the house were used by the business whether an LLC or sole proprietorship, but that is beyond the scope of this article.

Limited Liability Company with Multiple Owners, Taxed as a Corporation
The rules that apply to a corporation would be identical in this scenario, meaning any long-term capital gain would be taxed only within the LLC.

Limited Liability Company with Multiple Owners, Taxed as a Partnership and General Partnership
Partnerships are similar to S corporations in that the individual items of income and loss are not taxed within the partnership, but are passed through to the individual partners and taxed on their individual income tax returns. Thus, any sale of a house by the partnership would be taxable to the individual partners not the partnership. If the partnership owned the house for more than one year then the gain would be eligible for the long-term capital gains tax rate, which is currently 15%.

The Bottom Line
The real troublesome issue with respect to a house owned by a business is the loss of the home sale exclusion. The home sale exclusion allows individuals who own a home as their primary residence to exclude up to $500,000 of the gain from taxation ($250,000 for individuals whose filing status is single). When the house is owned by a business this home sale exclusion is lost, which is a significant tax consideration. As in any tax transaction, it goes without saying that individuals need to seek the advice of a CPA or Attorney.

SEE: Should You Incorporate Your Business?

RELATED FAQS
  1. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  2. How are non-qualified variable annuities taxed?

    Non-qualified variable annuities are tax-deferred investment vehicles with a unique tax structure. After-tax money is deposited ... Read Full Answer >>
  3. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>
  4. Are credit card rewards taxable?

    Credit card rewards are taxable in the United States some of the time. The Internal Revenue Service (IRS) classifies credit ... Read Full Answer >>
  5. Are Social Security benefits taxable after age 62?

    Eligibility to collect Social Security benefits begins at age 62. Many seniors, to collect larger benefit amounts, wait until ... Read Full Answer >>
  6. How are joint ventures regulated in the United States?

    Joint ventures are a very specific type of business arrangement. They can be organized in several different legal structures, ... Read Full Answer >>
Related Articles
  1. Home & Auto

    When Are Rent-to-Own Homes a Good Idea?

    Lease now and pay later can work – for a select few.
  2. Economics

    The Top 9 Things to Know About Hillary Clinton's Economic View

    Find out where former secretary of state and Democratic presidential candidate Hillary Clinton stands on the economy, jobs, trade and education.
  3. Professionals

    Holding Out for Capital Gains Could Be a Mistake

    Holding stocks for the sole purpose of avoiding short-term capital gains taxes may be a mistake, especially if all the signs say get out.
  4. Home & Auto

    Après Ski to Profit: Investing in a Swiss Chalet

    Evolving Swiss property laws mean that Swiss ski chalets have become precious commodities – and excellent investments, even if you're not British royalty.
  5. Taxes

    What's Wrong with the American Tax System

    American's are highly taxed and we still run a deficit. We explain why.
  6. Home & Auto

    Is Running a Short-Term Rental Worth the Hassle?

    The pros and cons of hosting short-term rentals in your home.
  7. Investing Basics

    What's a Holding Company?

    A holding company is a corporation that owns enough voting stock in another company to control its management and policies.
  8. Insurance

    How to Shop for Home Insurance

    Tips for getting the best protection for your place and possessions.
  9. Retirement

    Top Tips for Minimizing Taxes on Social Security

    Social Security benefits are taxable under certain circumstances. Here are some ways retirees can lessen the tax burden.
  10. Fundamental Analysis

    An Inside Look at Pinterest's Business Model

    Learn about Pinterest and the type of company it is trying to become. Understand the company's business model and what makes it unique.
RELATED TERMS
  1. Passive Income

    Earnings an individual derives from a rental property, limited ...
  2. Duty Free

    Goods that international travelers can purchase without paying ...
  3. Wealth Management

    A high-level professional service that combines financial/investment ...
  4. Enterprise Investment Scheme (EIS)

    A UK program that helps smaller, riskier companies to raise capital ...
  5. Maquiladora

    A Spanish term for a factory located near the United States-Mexico ...
  6. Tax Deductible Interest

    A borrowing expense that a taxpayer can claim on a federal or ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!