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  1. #1
    Join Date
    May 2006
    Posts
    2

    Default Separating Ownership of a Building from Ownership of the Land

    We have a family farming corporation which owns the farming land and a farm-house located on that land.

    We would like to own the farm-house personally (to be able to claim principal residence exemption). Thus we need to tranfer the farm-house to ourselves (from the corporation). We cannot sever the land around the house as the land is unseverable (it's already been severed maximum amout of times).

    We need this arrangement:

    1. Farm-house is owned by us (personally).
    2. Farm-land is owned by the corporation (including the land under the house).
    3. We make a long-term leasehold agreement with the corporation for the land under the farm-house.

    We went to see one lawyer (big Bay Street firm, no experience with farmers). He said the above structure was probably illegal. He thought the ownership of the building (the farm-house) probably cannot be separated from the ownership of the land (on which the building is located) in this maner.

    We went to see another lawyer (solo operation, doing a little bit of real estate). He said he could do everything (transfer the building, make leasehold agreement with right of access to the house, etc), no problem.

    If we go ahead with the second attorney, how can we be sure the documents he makes would actually be valid in a court of law? Given the opinion of the first lawyer, we are afraid we might end up with a real estate "deed" not worth the paper it's written on. And when we're slapped with huge capital gains 20 years down the road, our second lawyer will be long gone.

    Is there anything we can do to clearly establish once and for all that the transaction is legal? For example, can we have a court review the documents the second lawyer prepares and declare that the transaction is legal?

    Also if anybody is familiar with law pertaining to incorporated farms, please advise how can the farmer own the farm-house and the farming corporation own the farm-land, if the land is not severable?

  2. #2
    Join Date
    Mar 2005
    Location
    Michigan
    Posts
    28,656

    Default Re: Separating ownership of the building from ownership of the land

    Real estate laws vary by state, and zoning regulations vary locally, so it is unlikely that you can get any definitive answers without at least specifying what state you are in.

    How can you be certain? You may not be able to achieve absolute certainty. Have another qualified lawyer review the paperwork. Make sure both lawyers (the one who writes the paperwork and the one who reviews it) are insured.

  3. #3

    Default Re: Separating ownership of the building from ownership of the land

    You may be better off keeping it in the company. That way you can depreciate the house along with all expenses can be paid by the company. If it is a requirement that you live on the farm, basically the company can provide you a place to live and pay all of the expenses like electricity etc. This may be of more benefit than the property tax exemption since the property tax is a company asset and can deduct the taxes. Otherwise you will have to itemize to take advantage of them at tax time plus the taxes will come out of your pocket.

    Is the cutting up some type of county limitation? If so you can usually apply for and get an exemption. What you are attempting to do can cause more trouble than what you are going to save.

  4. #4
    Join Date
    May 2006
    Posts
    2

    Default Re: Separating ownership of the building from ownership of the land

    aaron - thank you for your reply.
    I'm in Ontario, Canada

    Quote Quoting aaron
    Have another qualified lawyer review the paperwork.
    It's an idea. But we need something more bulletproof. Having insured lawyers may not help us as this may only come back to bite us decades later when we or our children need to sell the property. Those lawyers will not be around for us to sue in 50 years

    Isn't there a way to get a judge (or court) review the transaction and declare it legal? I don't know the exact legal term for it, but I'm sure I heard about people doing that. Sort of having the transaction validated by the court as legal...

    lwpat
    Quote Quoting lwpat
    You may be better off keeping it in the company. That way you can depreciate the house along with all expenses can be paid by the company. If it is a requirement that you live on the farm, basically the company can provide you a place to live and pay all of the expenses like electricity etc. This may be of more benefit than the property tax exemption since the property tax is a company asset and can deduct the taxes. Otherwise you will have to itemize to take advantage of them at tax time plus the taxes will come out of your pocket.
    We looked at the option of leaving the farm-house in the company and discussed it with our accountant at length.

    You correctly pointed out the advantages:
    1. Depreciation on the house - deductible by the company.
    2. Property taxes are paid by the company - and are deductible by the company.

    However we are thinking long term. Depreciation on the house will become very small long-term. Our property taxes are under $3000 - so the tax savings are very small (at 18% corporate tax rate).

    But the disadvantages are much greater:
    1. Capital gains on the house not sheltered by "principal residence exemption"
    - could be hundreds of thousands by the time our children might decide to sell.
    2. We would have to pay either taxable benefits (secondary to living on "company property", i.e. the farm-house) or rent. And then our children and their children would have to pay those taxable benefits (or rent), since the structure that we set up now will be in place for generations. And those taxable benefits would have to be at market value - i.e. how much it would cost someone to rent a two storey house like ours. We are talking a lot of money here

    The fundamental question here is very simple: can a farmer own the principal residence while the farming company owns the land on which it is located?

    My gut feeling is that such a key land-use issue would be regulated on a federal level, and would not be dependent on a local municipality.

  5. #5
    Join Date
    Nov 2005
    Posts
    310

    Exclamation Correction on tax advice.

    Quote Quoting lwpat
    You may be better off keeping it in the company. That way you can depreciate the house along with all expenses can be paid by the company. If it is a requirement that you live on the farm, basically the company can provide you a place to live and pay all of the expenses like electricity etc.
    While we have found out since you posted this that the OP lives in Canada, under Section 119 of the Internal Revenue Code, the housing would have been taxable to the OP. Three tests have to be met in order for the housing to be excludible from income: 1. Housing or lodging must be on the premises of the employer; and 2. The employee must accept such lodging as a condition of employment; and 3. The lodging is furnished for the convenience of the employer. In the case of Robert G. Hatt (28 T.C.M. 1194, affirmed per curium 457 F.2d 499 (7th Cir. 1972)), there was a similiar situation, except that it was a funeral business involved. The issue was the third test. The Tax court found that the third test was not automatically failed because Hatt was president and majority stockholder of the funeral company. Paraphrasing, the Tax Court looked at the business necessity for having Hatt available after hours and found it to be reasonable since the business "requires someone to be in attendance 24 hours a day." I doubt that the OP could substantiate the business necessity of having someone available on premises after hours for a farming business.

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