Corporation for Real Estate Investing?

25391 Views 15 Replies 10 Participants Last post by CharlesF.Donahue, Apr 3, 2015

eddieparker

Discussion Starter · Jul 26, 2009

Hello:

I'm curious if any guru's can help me out here.

The wife and I currently own a condo as a rental property. We also currently rent out a suite in our own home.

We currently do this as our own assets, but we've been thinking more and more that the next investment condo should perhaps be held under a corporation; for the tax savings and removal of liability.

Over the years we have talked to some tax professionals about this, and they all did some hand waving and never really gave us a straight answer. Two such answers we received was:

"It's not worth it until you have two or more properties."

and

"Only do it if you look forward to higher accountant fees."

At the time we didn't ask more questions, and rather blindly trusted them; but now I'm starting to think it might be better to nail down the truth as to whether this makes sense or not.

Does anyone know the benefits of doing this? I'd particularly like the opinions of any who have done this before.

Cheers,

-e-

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NorthernAlex

· #2 · Jul 26, 2009

Hi Eddie.

A smart RE investor told me once, if you don't know why you need a RE corp., you don't need one.

The accountant will tell you: For tax reasons.
The lawyer will tell you: For liability reasons.

Both can be right, BUT also have their down sides.

I know a couple investors with 70+ doors, but without a corp, but also investors with 20 units and a corp.

I have 9 rental units and am not thinking of incorporating. KISS. Keep It Simple System.

mrcheap

· #3 · Jul 28, 2009

Eddie,

You may find this article useful: http://www.johntreed.com/entity.html

It's written for an American audience, but many of the ideas are relevant to Canadians.

leslie

· #4 · Jul 29, 2009 (Edited)

I disagree that there is a tax benefit. While the gov. WANTS to encourage active businesses that employ people and contribute to the economy (and so they lower the corp tax rate for them) they do not see the benefit from holding passive real-estate or investments. So the lower corp tax rate does not apply to that kind of income.

See for yourself.
http://www.kpmg.ca/en/services/tax/taxrates.html
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/rts-eng.html
http://www.cra-arc.gc.ca/E/pbg/tf/t2sch7/t2sch7-06e.pdf
http://www.cra-arc.gc.ca/E/pub/tp/it195r4/it195r4-e.txt

The only possible benefit would maybe be from the impact of claiming depreciation. E.g. if the ppy has a net positive cash flow it probably has taxable income unless depreciation is taken. If you belong to the camp that claims RE never depreciates, then you would expect all that depreciation to be recaptured when sold. Inside a corp there are no tax-brackets, so this would be taxed the same a usual. Personally, a big recapture would push your personal income into a higher tax bracket, so it might be better to bite the bullet and be taxed yearly. A lot of assumptions necessary to evaluate the tradeoff.

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NorthernAlex

· #5 · Jul 30, 2009 (Edited)

Rental income will be taxed as passive income aka. highest corporate tax rate. Disadvantage here. Leslies links proof it nicely, thank you!

It would be best, eddieparker, if you take some numbers to your accountant and ran it through, but I still would say, No Corp. as it still hurts the KISS.

Best,
Alex.
-------------------------
Four reasons to incorporate for smaller residential properties:

1) limited liability, unless personal guarantee is required for mortgage

2) income can be paid different ways, such as dividends or management fees to various people

3) JV partner can be brought on board without having him/her on mortgage and to protect them from a disaster, via shares and/or shareholder loans

4) different shares % and shares classes allow for elegant profit splitting and separation of "control" from "profit sharing"

Three reasons NOT to incorporate for smaller residential properties:

1) It is more difficult to get a mortgage, as not all banks hand out residential mortgages to small properties held in a corporations

2) you will have to sign a personal guarantee .. so in Alberta, for example, you will be personally liable for a mortgage default if in a corporation, whereas a personally held non-insured mortgage will have recourse ONLY against the property, but not you personally ! This is an Alberta advantage that does not, to my knowledge, exist in other provinces !!

3) annual filing and accounting costs .. probably about $2000 to $3000 or more PER YEAR .. depending on complexity

taken from Thomas Beyer, President of Prestigious Properties Group, written in the RE forum, where I am active and the gentleman I was quoting in my first post.

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leslie

· #6 · Jul 30, 2009

I second the rule KISS.

Another reason NOT to incorporate surfaced this last year. People on these sites were asking what to do about the capital gains they had realized inside corps that held their real-estate (just sold for big profits).

At the same time they had lots of capital losses sitting outside the corp from their investing portfolios. There was no way to match them to cancel out.

NorthernAlex

· #7 · Jul 30, 2009

Leslie, sorry, newbie question (as I am quite new in Canada and still not used to the CRA rules as I have been in my old home):

Is it possible to use RE gains against Stock losses? I thought, that it wont be possible as it is a "different category".

Thank you,

Alex.

Jademonkey

· #8 · Jul 30, 2009

I am in the process of purchasing real estate that is going to be held in a corporation. I am doing this because of control(doing it with a partner) as well as tax reasons. I agree there are advantages and disadvantages to a corporation, but for my situation it is beneficial. As a side note, I am a CA so I am able to do the accounting/tax work myself rather then having to hire someone. If I had to hire someone to do it, I do not think the advantages would outweigh this cost.

Everyone is in a different situation, and the only way to know what works best for you is to do some research. Leslie provided good information as a starting point for making this decision.

leslie

· #9 · Jul 30, 2009

All the capital gains realized by an individual are lumped together, no matter from what source, on Schedule3. And it is only the NET gain/loss that is relevant for that year's tax and carryforwards/backwards.

But a corporation is considered a separate 'person'. So you cannot offset the capital gains/losses between the individual and the corp.

NorthernAlex

· #10 · Jul 30, 2009

Leslie: It seems that my question was not clearly written. Sorry about that!

I will try it differently:

Is it possible for a company which makes a 100,000$ Real Estate capital gain to deduct this RE capital gain with a 100,000$ Stock loss?

Thank you,

Alex.

83gemini

· #11 · Jul 30, 2009

The short answer is it is possible. The longer answer is that use of a corporate structure to hold an investment portfolio is complex, and the consequences of holding such a portfolio is not necessarily straightforward.

PaulHarrell

· #12 · Feb 14, 2015

mrcheap said:
Eddie,

You may find this article useful: http://www.johntreed.com/entity.html

It's written for an American audience, but many of the ideas are relevant to Canadians.

Thanks for the link. Yeah very useful.

PaulHarrell

· #13 · Feb 14, 2015

NorthernAlex said:
Leslie: It seems that my question was not clearly written. Sorry about that!

I will try it differently:

Is it possible for a company which makes a 100,000$ Real Estate capital gain to deduct this RE capital gain with a 100,000$ Stock loss?

Thank you,

Alex.

I think it is not possible.

_______________________________
Paul Harrell of IdahoHomeRunTeam

kamdash

· #14 · Feb 21, 2015

Hi...I already have a (Professional) Corporation in place with my wife (NOT real estate related). I have been thinking about doing my RE investing thru this corp as a way of Estate Planning...that is by giving my kids shares in the corp....Anyone has any thoughts or experience about that...Thanks

Sm5

· #15 · Feb 21, 2015

Professional Corporations are usually limited in what they can do (investment wise) as well as who can be shareholders (some professions don't allow children over 18 to be shareholders of the PC, some allow family trusts and others do not). Best talk with your wife's accountant or lawyer before getting too far along.

CharlesF.Donahue

· #16 · Apr 3, 2015

Almost all of land in this areas are useful where people really want to live and can discover work in much more limited area. And the quantity of directly developed land is even minor, and mostly owned by real estate. You have to do some research and make a goal.

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