Taking an income from my Real Estate Business

[Thomas Beyer]

QUOTE (jessandy @ Jan 21 2009, 07:17 PM) I was told that becoming incorporated was best for all RE investors for: tax avoidance (not evasion), and for limiting legal action (e.g. tenant sues me)... what are your thoughts on this?

yes legal issues are a consideration when incorporating .. but they can sue you personally anyway if they want ..

yes, tax issues are also consideratons. I do NOT see how you pay less tax when being incorporated ! How ? You can employ kids or a spouse (or shall I say: spouses soon in Canada) as a sole proprietor or as a company ..

QUOTE (jessandy @ Jan 21 2009, 07:17 PM) Also, if you have time, how would you recommend structuring a start-up real estate business (3 or less properties), just sole-proprietor?

start small, grow, then adjust .. Keep it Simple for Success (the KISS principle !!)

Make some money in RE first .. then worry about incorporations or structures .. don`t major in minors !

 

[RArora]

Hi!

I dont have a full time job-my husband is the main income earner in the family. I handle the learning, and investing part of the real estate business-so since I don`t have a typical t4 generating job and hence no income can we show on our tax returns that I take 10% of the rental income as management expense/bookkeeping (whatever one calls it). That way it will still be reported as income but on my side and hence won`t be taxable as it will be below the minimum taxed amount (since we only have 2 rental properties that we bought this yr)?

Also do we have to show anywhere right now how much the homes cost us to buy, the closing costs etc? for one of the homes we paid the closing costs from our own savings whereas for the 2nd one we used the LOC... dannielsen?

Thanks

 

[sunkat]

QUOTE (holymoly @ Jan 21 2009, 08:35 PM)
Thanks very much for your response and the clarification, Dan!





Interesting. I hadn't considered that at all, Thomas. Thanks for the insight.



Sorry for hijacking your thread, sunkat!






That's the beauty of myreinspace everyones input is very helpful and it leads to other discussions.



I also had all my properties in corporations on the advise of my old accountant. It was costing me a fortune and was very confusing. In some ways I believe it was an extra money grab. (I'm sure I will get alot of flack for that comment). Simple, safe and boring works much better for me.



I also had a great deal of difficulty getting mortgages.



Since then I have removed them all and increased my liability ($2,000,000 personal injury) insurance for protection. It has saved me money and headaches (due to the cost & complexity issues). I've even spoken with a REIN recommended accountant who has a large portfolio (I believe it was around 50 properties before he considered incorporating). He said it was not necessary.



Thank you everyone for your input.

 

[sunkat]

QUOTE (dannielsen @ Jan 20 2009, 01:57 PM) Hi Mark,

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This is a great question. I had my own accounting business for 12 years doing corporate and business taxes. Now keep in mind that I sold the business almost 3 years ago but here is my 2 cents.

If you are operating your real estate business personally (not incorporated) you CANNOT pay yourself a salary. You can make withdraws from your business account personally, but in CRA`s eyes you pay the tax on your NET income from your Real Estate Business. You cannot deduct any amount for management fees or salary paid to yourself.



If you are a corporation, you may be best off paying yourself dividends rather than a wage in most instances. There are many factors that your accountant would have to look at, such as any other income (job), the company`s Balance Sheet etc. this becomes a very detailed and complicated topic which varies with each individual case.

In most cases I would recommend that real estate investors do not incorporate.



An excellent quick reference manual that every real estate investor should have is Form T4036 / T776. You can obtain this manual on line at www.cra.grc.ca or you can call them at 1-800-959-2221 and they will mail you a copy. This is an excellent booklet that explains what you can and cannot use as an expense and what is capital vs. expense. This form is for personal tax returns, not for limited companies.



I hope that this helps.


Dan Nielsen

Thanks Dan for the tip on the manual.

 

[dannielsen]

Jessandy,

I am not sure who told you that becoming incorporated is the best thing to do, but I would strongly suggest that you take your time and carefully research the pros and cons and long term effects of creating a limited company. Accountants will vary on this issue but generally there is not need to incorporate until you are paying well over $50,000 a year in taxes from your real estate business or for certain succession and estate planning. I would recommend that you set up your real estate business as a Sole Proprietor, as Thomas said “KISS, Keep it Simple” Good Luck, keep on moving forward.



RArora,

I am not familiar with the tax laws in Ottawa, I can only speak of my experience in Alberta. You are on the right track, here is my 2 cents for you. Buy the properties in both names, prepare your rental income and expense on T776 of your personal return. You can then choose at the bottom of the page how much of the net income or loss each spouse is claiming. This is usually 50/50, but it can vary based on amount of work and time put into the business by each spouse. And in your case, based on the minimal amount of info I have I would suggest that you take a higher percentage of the net income as you will be taxed at a lower rate than your spouse. Keep in mind that no matter what percentage you choose, you are still considered a partner and therefore you cannot pay yourself a management fee. This percentage should be established on your first rental business return and it should not be changed at all unless there is a significant change in operations or time spent. As this is a major red flag for CRA (Revenue Canada) to request an audit.

In regards to your second question, No you do not have to show the cost of the purchases, unless you are going to depreciate the properties. Check with guide T4036 / T766 to confirm what expenses are part of your purchase value and what can be expensed out. This will not change whether you paid it out of savings or using a LOC, it is the same rules either way.



Sunkat,

>Thanks for sharing your experience. CONGRATULATIONS on not giving up. Your are a great example of not getting frustrated and keeping your eye on your goal and move forward. Good luck in the future, I am sure that you will be very successful.



Dan Nielsen

 

[RArora]

Thanks Dan! I appreciate your time and advice.

Since PM fees are usually 9-10% would it be safe for me to take that as an income from the 2 home rentals?

the reason i mentioned the closing cost qs was to understand if the interest charged on the LOC used for closing cost can be used as an expense... If its simple income-expense for 2 properties i dont want to hire an accountant, and since this was the yr we bought both these properties-for the long run hopefully-I wondered if anything from the purchase costs/price etc has to be reported on tax returns to the govt-or if it is done only at the time these are sold...

Thanks again!

Rasna

 

[dannielsen]

Hi Rasna,



Keep in mind that if you are going to be a partner with your spouse in the RE bus, you cannot pay yourself a wage. Unless you set up a separate business return on your T1 reporting contracting income from the partnership – be careful here, personally I would go back to the old KISS principal and just take a percentage of the RE business, unless it was a significant tax savings to do otherwise.

The interest on the LOC is an expense. You do not have to report any purchasing costs on your T1 until you sell, unless you depreciate the property. I would recommend that you do the income and expense statement yourself and then take it to a good RE accountant to either review it for you or to process your tax return. A good accountant should be able to save you money, if not immediately at least in the long run.

 

[mlwilliamson]

I think the last accountant answered it correctly. Hopefully your accountant is providing you tax planning sessions to minimize overall family tax burden.

Cheers,


QUOTE (sunkat @ Jan 19 2009, 09:26 AM) Good morning,

I have a question I would like to put out there.

I am currently spending the majority of my time these days doing and over seeing renovations on the new properties (single detached homes) we are adding to our portfolio.

My question is, can I pay myself for doing my own renovations and if so how do I determine what is reasonable without raising eyebrows with CCRA.
I have an answer from my accountant but I thought I heard something at a REIN meeting about this.

Thank you all

Mark Beech

REIN Member

 

[Thomas Beyer]

QUOTE (RArora @ Jan 22 2009, 12:13 PM) Since PM fees are usually 9-10% would it be safe for me to take that as an income from the 2 home rentals?

the reason i mentioned the closing cost qs was to understand if the interest charged on the LOC used for closing cost can be used as an expense... ..
an expense is an expense ..

income is income .. taken personally from a corporation or taken personally from a JV or taken personally from a sole proprietorship .. where is the problem ?

 

[Nir]

Hi All,

Isn`t there a HUGE advantage that losses in first years (in case there are losses) CAN BE transferred to following years in the case of a corporation but not in the case of sole proprietorship? This was not mentioned by any of the accountants so I`m curious to know why they do not see it as one HUGE(!) benefit a Corp has that a sole proprietorship does not(?)

(Well, you do not incorp to lose money of course but I heard it is actually expected/normal to see losses first years.)

Thanks & Regards,

Neil

 

[GarthChapman]

QUOTE (investmart @ Feb 11 2009, 11:43 PM) Hi All,

Isn`t there a HUGE advantage that losses in first years (in case there are losses) CAN BE transferred to following years in the case of a corporation but not in the case of sole proprietorship? This was not mentioned by any of the accountants so I`m curious to know why they do not see it as one HUGE(!) benefit a Corp has that a sole proprietorship does not(?)

(Well, you do not incorp to lose money of course but I heard it is actually expected/normal to see losses first years.)

Thanks & Regards,

Neil

Neil, that`s a very good point when the investor has no other income to offest any losses against. We used this to great advantage in our first few years. But I did what I do not advise others do, that being I had no job when I started our real estate business - times were good then and I had lots of business experience, contacts and private money to draw on.

New investors should keep their job, then any losses in the first year or two would simply reduce taxes payable from that job income.

 

[Thomas Beyer]

QUOTE (investmart @ Feb 11 2009, 11:43 PM) Isn`t there a HUGE advantage that losses in first years (in case there are losses) CAN BE transferred to following years in the case of a corporation but not in the case of sole proprietorship? This was not mentioned by any of the accountants so I`m curious to know why they do not see it as one HUGE(!) benefit a Corp has that a sole proprietorship does not(?)

(Well, you do not incorp to lose money of course but I heard it is actually expected/normal to see losses first years.)
you can carry forward personal (sole proprietor) losses too !

 

[Nir]

Good point Garth. Yes, I guess only if you have no job (and Thomas was wrong incorporating can be an advantage from this point of view.

Thomas, I did not know that. Actually I specifically heard the opposite - that sole proprietor can not carry losses but forgot where or who told me that (perhaps an accountant - hmmm conflict of interest?) .

Thanks,
Neil

 

[Thomas Beyer]

QUOTE (investmart @ Feb 13 2009, 10:33 PM) Actually I specifically heard the opposite - that sole proprietor can not carry losses but forgot where ...
Just because you heard it doesn`t mean it is correct ..

 

[RArora]

I have now removed the 10% of the rental income that I was taking for managing the properties from my taxes... the ufile system automatically puts all expenses on my husband`s side since my income is below the taxable amount anyway...for the best return...