What's a real estate holding company?
Probably the most famous holding company in the world is Warren Buffet's Berkshire Hathaway, which owns a variety of insurance companies, manufacturers, retailers and other companies. Berkshire's diversification, however, means it is not exclusively a real estate holding company.
Features
A holding company does not usually conduct much direct business, but owns controlling interests in other businesses that do. Thus, one definition of a holding company is that it derives the majority of its income through dividends, interest, royalties and rent collection. In the case of a real estate holding company, most of the company's assets will be real estate or businesses, like hotels, resorts or casinos, whose chief value assets are related to real estate.
Function
The purpose of a real estate holding company is to provide an advantage to the company's owners, either strategically, through preferential tax treatment, or otherwise. A well-funded holding company that specializes in real estate might attract the expertise of professionals who bring their own advantages.
Significance
If a real estate holding company does not take action to develop or improve a piece of real estate under its ownership, the profits it realizes from the sale of the real estate is taxable as capital gains instead of regular income. In addition, ownership of the holding company itself can be transferred through the sale of stock and thereby effectuate transfer of title to the real estate without triggering any real estate transfer tax. Wealthy individuals frequently own their real estate through holding companies for these very reasons, in addition to the other liability protections afforded by the incorporated structure.
Effects
Real estate holding companies allow for a relatively small group of individuals to conveniently control a vast amount of property owned in a variety of different subsidiaries, while receiving preferential tax treatment. Some states have proposed closing some of the tax loopholes that benefit holding companies. In most cases, however, this is difficult to do without penalizing legitimate business activities, such as the transfer of real estate to a company in exchange for ownership of property.
Considerations
A holding company is not necessarily the top tier in a complex corporate organization. As the name implies, it is more often simply itself a subsidiary of a still larger corporation that uses the holding company to divide and control assets. One example is Sears Holdings, a company that owns and operates the familiar Sears retailer as well as the real estate formerly owned by K-Mart, and other assets. A majority interest of Sears Holdings, however, is owned by RBS Partners, an investment company whose board includes Sears Holdings' CEO, Edward Lampert.
