In private client practice the question of tax on the sale of real estate by a family foundation usually arises when the foundation is considering a change in the structure of its investment portfolio. The answer is of significant strategic importance, since it affects the efficiency of managing family assets. PLA.partners advises private clients on how to structure the policy of disposing of real estate within the foundation so as to make maximum use of the available tax exemptions.
Short answer, sale of real estate in a family foundation usually without CIT
As a rule, a family foundation is exempt from corporate income tax on disposing of real estate. The condition of this exemption is, however, that the property was not acquired by the foundation solely for the purpose of further sale, for example as part of typical real estate trading activity. Sale of real estate within ordinary management of the foundation’s assets is not subject to CIT.
Maciej Pilarek, attorney and partner at PLA.partners, points out that this parameter is one of the main reasons why business owners holding real estate decide to place it within a family foundation. The possibility of a later sale under the conditions of the tax exemption significantly increases the flexibility of portfolio management.
Border of the exemption, when the foundation will pay tax on sale
The exemption does not cover situations where the property was acquired by the foundation solely for the purpose of further sale. This is an important boundary, since it distinguishes ordinary management of assets from activity of a trading character. A family foundation should not be used as a vehicle for ongoing real estate trading typical of developer activity or trading in properties acquired with the intent of a quick sale.
In the practice of the PLA.partners team this parameter is analysed in every real estate acquisition by the foundation. The intention at the moment of acquisition itself matters for the later settlement of a disposal transaction. PLA.partners experts help arrange the acquisition context so that classifying the disposal as tax neutral is well documented.
Sale within ordinary management, the most common scenario
In the typical scenario, the sale of real estate held within a family foundation for a longer time, used for rental, lease or other management, falls within ordinary management of assets and is tax neutral at the foundation level. Funds obtained from the sale reach the foundation free of current tax burden and may be reinvested within the foundation.
PLA.partners experts design the foundation’s real estate portfolio with this mechanism in mind, so that sale decisions are coherent with the investment policy and succession goals of the family.
Reinvestment of proceeds from real estate sale
One of the significant effects of the tax exemption on the sale of real estate within a family foundation is the possibility of reinvesting funds in full amount, without reduction for tax. The foundation may use these funds to acquire further real estate, securities, shares in companies, or to fund distributions to beneficiaries.
In private client practice this parameter significantly increases the speed of asset growth over the long horizon. Funds that in a classical structure would be reduced by tax can in the family foundation be reinvested in full amount.
Legal and business consequences for the client
From the decision-making perspective within the family, the policy of selling real estate within the family foundation means:
- tax neutrality of the sale of real estate within ordinary management,
- the risk of losing the exemption where the property was acquired with intent of further sale,
- the ability to fully reinvest proceeds from the sale,
- the need to document the intention at the time of acquisition,
- the influence of the sale policy on the distribution policy for beneficiaries,
- the need for continuous review of the real estate portfolio against the exemption.
Possible actions, a plan for the business owner
In the practice of the PLA.partners team, designing the policy of selling real estate within a family foundation involves:
- a map of properties held within the foundation and expectations as to their further fate,
- assessment of the acquisition context for each property under the intention criterion,
- design of a real estate disposal policy coherent with the foundation regime,
- documenting ordinary management of assets over the period preceding sale,
- tax assessment of planned disposals,
- arranging a plan for reinvesting proceeds from sales.
Contact PLA.partners Law Firm
Do you need legal support or an individual analysis of your matter? Visit PLA.partners and contact our team, we will help assess the situation and propose specific solutions.
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