I need some insights regarding financing of property owned by a related party where the assets are staying on the former company's books while the new company gets the debt on its books. Company A owns Company B. Company B has several real estate assets that it had financed through one mortgage entity. Company A paid off Company B's debt but the assets associated with Company B's debt are going to stay on Company B. The new liability will be on Company A. I know that my entry to record the debt on Company A will be a credit to the liability account of Company A and on Company B I will debit the former liability account. However, I'm having issues wrapping my mind around the other side of the entry for each entity. I'm leaning toward it being a capital contribution for one company and a capital distribution for the other since when the entities are consolidated it will be a wash between Company A & Company B. What insights do you have and am I missing something that would be helpful for direction?
Real Estate Transaction Between Entities
Answers
My take is it depends on the nature/intent of the transaction and tax planning. Your tax (
Hi Chris,
I may be misunderstanding the situation but if A paid off B debts by assuming a new debt obligation itself, I would recommend creating a new intercompany loan from A to B based on current arm's length market interest rates, ideally matching the terms of A's debt to the third party. You could add a spread to the rate charged by A to B if B's creditworthiness is lower than A's.
This way if B earns the income from the properties it owns, it will use that cash flow to pay the intercompany interest and principal when due to A, so that A then has funds to pay the third party.
Company A:
Dr I/C Loan Receivable from B
Cr Loan Payable to 3P
Company B:
Dr Loan Payable to 3P
Cr I/C Loan Payable to A
Let me know if you think this makes sense to you or if you need further help.
Jake