My apologies for the delay in posting this.
First off, if you're going to do this, get professional advice from both a real estate lawyer and a good chartered accountant. I will also caveat this by saying I'm NOT an expert, and would welcome editorial/clarification help from others. This is how I see how we've structured our family's properties, but I may be biased from the particular way we've set it up.
I think there are a number of different entities for real estate, including partnerships, joint ventures and REITs, but I want to focus on corporations.
This play is for those of you who are starting to have multiple housing properties, and have concerns about a number of issues. Let me highlight some of the benefits and costs of setting up a corporation, and then conclude with an example of our structure.
Benefits of Setting up a Corporation
1) A Corporate Entity:I think one of the biggest positives is the concept that a company is an "entity", so that it doesn't die when the individuals die. It makes transferring of property easier with different classes of shares.
2) Ease of Transferability: This leads to the ease of transferring properties, because shares are more easily moved than a property per se.
3) Tax Benefits: A corporation is liable at a lower tax rates. For example, dividend income (at the marginal tax rate of 46%), would be treated at about 31%. This allows shifting of the tax burden to lower income family members to limit the amount of personal tax paid.
4) Limiting Personal Liability: The corporation is also important in limiting personal liability, if something happens at a property. This arm's length relationship provides a piece of mind. (Note, that if you do something criminal, you're still personally liable.)
5) Retained earnings for reinvestment: I think another benefit is that you don't always have to take money out, and you can target and reinvest for other properties and/or investments.
6) Ability to claim management costs: Since you've got to spend time managing all these properties, you can claim the management expenses.
Costs of the Corporation
1) It costs money to set up a corporation, both in legal fees (approximately $750), and the annual cost of keeping the books for each company (this figure would vary depending on the number of poperties.).
2) Need to set-up a board of directors and have an annual meeting (for most family corps, it's over dinner), with minutes, etc.
3) If the corporation makes money, it needs to pay tax, and if dividends are paid out, there's tax on that too. In general, the overall tax benefits are better under the corporation structure.
Structuring of the Corporation
1) There are many different ways to do this. How we've done it, is 1 property, 1 company, with a holding company overseeing this with differential shares for different members of the family. So that there are a board of directors for each company, and a board of directors of the holding company.
This allows different dividend "payouts" dependent on the class of shares and can act as a tax efficient income splitting method. However, having each separate building as an entity, means that each building is responsible for the legal responsibility of paying for costs. If the structure is done correctly, it could provide a very efficient passive income, limiting risks, and provide improved tax efficiency within family members and/or friends.
Just a few quick thoughts. Look forward to the comments.
First off, if you're going to do this, get professional advice from both a real estate lawyer and a good chartered accountant. I will also caveat this by saying I'm NOT an expert, and would welcome editorial/clarification help from others. This is how I see how we've structured our family's properties, but I may be biased from the particular way we've set it up.
I think there are a number of different entities for real estate, including partnerships, joint ventures and REITs, but I want to focus on corporations.
This play is for those of you who are starting to have multiple housing properties, and have concerns about a number of issues. Let me highlight some of the benefits and costs of setting up a corporation, and then conclude with an example of our structure.
Benefits of Setting up a Corporation
1) A Corporate Entity:I think one of the biggest positives is the concept that a company is an "entity", so that it doesn't die when the individuals die. It makes transferring of property easier with different classes of shares.
2) Ease of Transferability: This leads to the ease of transferring properties, because shares are more easily moved than a property per se.
3) Tax Benefits: A corporation is liable at a lower tax rates. For example, dividend income (at the marginal tax rate of 46%), would be treated at about 31%. This allows shifting of the tax burden to lower income family members to limit the amount of personal tax paid.
4) Limiting Personal Liability: The corporation is also important in limiting personal liability, if something happens at a property. This arm's length relationship provides a piece of mind. (Note, that if you do something criminal, you're still personally liable.)
5) Retained earnings for reinvestment: I think another benefit is that you don't always have to take money out, and you can target and reinvest for other properties and/or investments.
6) Ability to claim management costs: Since you've got to spend time managing all these properties, you can claim the management expenses.
Costs of the Corporation
1) It costs money to set up a corporation, both in legal fees (approximately $750), and the annual cost of keeping the books for each company (this figure would vary depending on the number of poperties.).
2) Need to set-up a board of directors and have an annual meeting (for most family corps, it's over dinner), with minutes, etc.
3) If the corporation makes money, it needs to pay tax, and if dividends are paid out, there's tax on that too. In general, the overall tax benefits are better under the corporation structure.
Structuring of the Corporation
1) There are many different ways to do this. How we've done it, is 1 property, 1 company, with a holding company overseeing this with differential shares for different members of the family. So that there are a board of directors for each company, and a board of directors of the holding company.
This allows different dividend "payouts" dependent on the class of shares and can act as a tax efficient income splitting method. However, having each separate building as an entity, means that each building is responsible for the legal responsibility of paying for costs. If the structure is done correctly, it could provide a very efficient passive income, limiting risks, and provide improved tax efficiency within family members and/or friends.
Just a few quick thoughts. Look forward to the comments.