The Napa Valley is a great location to vacation as well as to have your company retreat. Many of the quintessential luxury estates throughout the Napa Valley are vacation homes or company-owned retreats.
I noticed the number of estate homes in the Napa Valley owned by corporations or LLCs. In my final article of the series on luxury estates, I would like to discuss this practice and ramifications to consider.
Companies can find an expansive estate to be not only an asset to use for entertaining clients or long weekends of vision casting by the management team, but also an incentive as part of a bonus package for a two-week stay in the Napa Valley for an employee who excels.
The method of structuring the purchase and holding title of the real estate can have a huge impact on your use of the property as well as your taxes.
The ongoing operations as well as when the time comes to sell will be dictated by your choice. I am not an attorney or tax specialist, but the way you hold title and how you use the property has significant tax consequences.
Ron and Barbara, who live in Georgia, also own a successful company there. They also have many clients in the Bay Area and a love of food, wine and the Napa Valley. They chose to purchase a $5.5 million estate in St. Helena as a second home that was large enough to host events with clients as well as host company retreats.
They would use the estate for their vacations while charging their company market rent when used for business purposes.
Ron and Barbara love their new vacation home, staying longer after each business event ended — about 30 personal days total out of the year with business use 180 days. They included the income and took their fair share of expenses, interest and depreciation for the days the estate was rented to their company as a business expense on their tax returns.
Ron and Barbara got busier, and while their business use of the estate increased, their personal time there eventually subsided. After a year their personal use ended up being about seven days while the business use increased to 210 days.
Eventually the estate lost its classification as a vacation home and from a tax view is solely a rental property. The tax rules changed as their use changed. Some of the changes could be beneficial from a tax view while others, when it comes time to sell, not so much.
There is also a little-known tax law called the self-rental rule. Essentially, there are limitations when renting real estate owned personally to your company that can significantly impact your tax strategy.
It is important to be strategic and plan ahead before your purchase. Ron and Barbara should haVE considered having their company purchase the estate, but need to be careful with personal use as this could create taxable events each time they use it.