Avoiding Florida Sales Tax on the Lease of Real Property to a Related Operating Company
In today’s rapidly appreciating real estate market, it is oftentimes desirable for asset protection purposes to separate the ownership of real property from the ownership of an operating business that utilizes the real property, particularly when the operating business is especially susceptible to lawsuits for malpractice or negligence. For example, a corporation that operates a physician practice and owns real property that it uses in its business (such as a medical office building) may want to have one entity (such as a limited liability company or a corporation) own the real property and a related entity own and operate the physician practice in order to protect the real property from creditors of the physician practice (such as persons that sue the physician practice for malpractice). In order for this separation of the real estate and the operating business to be respected for asset protection purposes, the entity that owns the real property should lease the real property to the entity with the operating business.
Separating the ownership of the real property from the ownership of an operating business for asset protection purposes is usually achieved through one of two structures. Under the first structure, known as the “brother/sister structure,” one entity owns the real property, a second entity owns the operating business, and both entities have common ownership. For example, one shareholder owns both Company A, which owns a medical office building, and Company B, which operates a physician practice out of the medical office building. Because the medical office building is utilized by the physician practice, Company A would lease the medical office building to Company B. Under the second structure, known as the “parent/subsidiary structure,” a shareholder would own one entity, the “parent entity,” which would own real property and would be the sole owner of a second entity, the “subsidiary entity,” which would own the operating business. For example, a shareholder owns all of the stock of Company Y. Company Y owns a medical office building and owns all of the stock of Company Z. Company Z operates a physician practice out of the medical office building, and leases the medical office building from Company Y. In both the brother/sister structure and the parent/subsidiary structure, the medical office building and the physician practice are owned by different entities so that creditors of the physician practice cannot recover the medical office building.
In the past, utilizing either the brother/sister structure or the parent/subsidiary structure for asset protection purposes could be expensive because Florida imposes sales tax on rental payments for commercial property, even when the landlord and the tenant are related entities. Taxable rental payments also generally include any payments related to the real property, such as mortgage payments, property tax payments or insurance payments, made by the entity that owns the operating business on behalf of the entity that owns the real property.
Now, however, attorneys with Williams Parker have devised a specific brother/sister and a parent/subsidiary structure that provides asset protection for real property and also avoids the imposition of Florida sales tax, provided certain requirements are satisfied. Through numerous discussions, the Florida Department of Revenue has approved of both of these structures and the avoidance of sales tax. Consequently, many business owners will now be able to restructure their businesses to implement an effective asset protection plan for real property used in the business without subjecting themselves to Florida sales tax on the lease of the real property.
If you have any questions regarding this tax-efficient structure for asset protection of real property, feel free to contact Mike Wilson via email at email@example.com or via telephone at 941-536-2043.