WHEN to switch to a corporation

[fumbrunner]

Hi all,

Great forum. I am hoping to get some advice as to when is the right time to switch to a corporation. I have read the threads on the pros and cons to doing so. From an income and tax perspective only, when does it make sense? I now have 7 doors and will be expanding to 10 soon. I have a good day job which puts me in a high tax bracket already. My wife has little income and she is on title for all the properties and we split the rental income 50/50. The rentals net about 30K annually. I am curious as to whether the added costs associated with filing as a corporation would negate any benefits in my situation.

Thoughts?

 

[Thomas Beyer]

QUOTE (fumbrunner @ Oct 26 2009, 07:31 AM) Hi all,

Great forum. I am hoping to get some advice as to when is the right time to switch to a corporation. I have read the threads on the pros and cons to doing so. From an income and tax perspective only, when does it make sense? I now have 7 doors and will be expanding to 10 soon. I have a good day job which puts me in a high tax bracket already. My wife has little income and she is on title for all the properties and we split the rental income 50/50. The rentals net about 30K annually. I am curious as to whether the added costs associated with filing as a corporation would negate any benefits in my situation.

Thoughts?
yes this probably makes sense @ 7-10 doors .. however there may be tax consequence rolling it into a corporation from you personally. Ask an accountant for rollover tax issues !

 

[Retreaters]

QUOTE (fumbrunner @ Oct 26 2009, 10:31 AM) Hi all,

Great forum. I am hoping to get some advice as to when is the right time to switch to a corporation. I have read the threads on the pros and cons to doing so. From an income and tax perspective only, when does it make sense? I now have 7 doors and will be expanding to 10 soon. I have a good day job which puts me in a high tax bracket already. My wife has little income and she is on title for all the properties and we split the rental income 50/50. The rentals net about 30K annually. I am curious as to whether the added costs associated with filing as a corporation would negate any benefits in my situation.

Thoughts?

Definitely interested in the responses here. We have a triplex and are looking at another property and are having the same issue. My accountant is advising against it so far as if we put it into a holding company we will be looking at a 50% tax rate on the positive cash flow (about $12,000/year). I`m thinking that we could take a lot out of it as we have owned it for 7 years and 3 of those were as a principal residence.

I understand that if you have >5 employees in the company it becomes an operating company as oppossed to a holding company and is no longer subject to the higher rate.

What about `gifting` the property to a company - I`m guessing that would be a real stretch.

I`ll watch the responses with interest!

 

[invst4profit]

In my opinion, and that of my accountant, there is no real advantage for the small investor to incorporate and as stated the taxes will be higher. As long as you are strictly a mom and pop investor I would keep it that way.
What advantages are you seeking to achieve with a corporation.

 

[Retreaters]

QUOTE (invst4profit @ Oct 28 2009, 12:52 PM) In my opinion, and that of my accountant, there is no real advantage for the small investor to incorporate and as stated the taxes will be higher. As long as you are strictly a mom and pop investor I would keep it that way.
What advantages are you seeking to achieve with a corporation.

Sorry, I didn`t mean to hijack the thread I can open a new one if preferred - I guess every case is different.

For our rental, I was hoping to take out some of the capital appreciation as it has increased about $100K over 7 years and as it was our principal residence for half of that, wouldn`t we be able to take 50% of that without capital gains tax? (combined with the fact that my wife is co-owner and was on a maternity leave for 2009 and so has had a much reduced income. If we are ever to change the ownership, she`d take a much smaller hit on her portion of the appreciation)

We are looking at a 10 plex and I guess we are wondering the same as the first post in that when does it make sense to look at other ownership structures for your properties.

Cheers

 

[Thomas Beyer]

QUOTE (Retreaters @ Oct 28 2009, 10:29 AM)
..

For our rental, I was hoping to take out some of the capital appreciation as it has increased about $100K over 7 years ..


taking capital out through a re-finance for an asset held personally is not taxable .. however the interest deductability is in question over and above the purchase price + upgrades ..



taxes are payable on income which is rent - eligible expenses - depreciation .. so a portion of that interest may not be eligible.



If the asset is in a corporation then "taking money out" is usually in the form of a management fee, salaries or dividends .. and all 3 are taxable once they come out of teh corporation !




QUOTE (Retreaters @ Oct 28 2009, 10:29 AM)
..



We are looking at a 10 plex and I guess we are wondering the same as the first post in that when does it make sense to look at other ownership structures for your properties.


for a 10-plex most banks require a corporation for a commercial mortgage, at least here in Alberta. You must incorporate. That may be different in other provinces.



related poston Pro`s and Con`s of creating a company for real estate holding:

http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10292-54272-To_create_a_company_or_not.html#54272

 

[Mitch Collins]

Hey everyone;

This is a great issue, and something that I`ve looked into personally with our situation as well. I currently own 17 properties with a total of 32 doors and have decided against incorporating. First of all, the costs and increased taxes up front did not seem to make sense. There would be seperate tax filing required for the corporation, I would need more than 5 `full time` employees to achieve the best tax rates, and more.

From my understanding, most people prefer not to hire out `employees`, but to hire professionals like PM`s to do the work for them, so the tax advantages of incorporating are lost without the employees that bring you a holding company status.

Todd - could you clearly state what the rules are regarding the whole employee issue and how it affects the tax rulings about your corporation?

Originially I wanted a corporation because I thought it seemed `cool`, and I wanted the image of a business owner, and then realized that no matter what the `structure` of my deals were, it all boiled down to the same thing - buy property, collect rent, renovate, and then pay the least amount of taxes as possible..

This is a great thread to keep an eye on to see where it goes...and who knows, there might be something I haven`t heard yet that will make me rethink things.

Good luck!

 

[fumbrunner]

QUOTE (MitchCollins @ Oct 28 2009, 02:47 PM) Hey everyone;

This is a great issue, and something that I`ve looked into personally with our situation as well. I currently own 17 properties with a total of 32 doors and have decided against incorporating. First of all, the costs and increased taxes up front did not seem to make sense. There would be seperate tax filing required for the corporation, I would need more than 5 `full time` employees to achieve the best tax rates, and more.

From my understanding, most people prefer not to hire out `employees`, but to hire professionals like PM`s to do the work for them, so the tax advantages of incorporating are lost without the employees that bring you a holding company status.

Todd - could you clearly state what the rules are regarding the whole employee issue and how it affects the tax rulings about your corporation?

Originially I wanted a corporation because I thought it seemed `cool`, and I wanted the image of a business owner, and then realized that no matter what the `structure` of my deals were, it all boiled down to the same thing - buy property, collect rent, renovate, and then pay the least amount of taxes as possible..

This is a great thread to keep an eye on to see where it goes...and who knows, there might be something I haven`t heard yet that will make me rethink things.

Good luck!

Good post Mitch. If there are individuals such as yourself with 10+ buildings and still see the advantages of owning them as an individual, then it probably continues to makes sense for myself as well. I will be approaching my accountant around tax time to pose the question, but I suspect her answer will be the same as the comments here.

 

[OlegP]

QUOTE (invst4profit @ Oct 28 2009, 10:52 AM) In my opinion, and that of my accountant, there is no real advantage for the small investor to incorporate and as stated the taxes will be higher. As long as you are strictly a mom and pop investor I would keep it that way.
What advantages are you seeking to achieve with a corporation.

This is one of the most hotly debatd issues. After reading about it a lot and talking to a number of investors including accountants, I am still confused, as there seems to be a lot of "if..then" statements. I read about a three-corporation approach with a Holding Company incorporating a Management company, which in turn incorporates a Property owning company. Shifting dividents around these companies apparently minimizes taxes. I believe there is a thread in this forum which describes this concept based on Robert Kiyosaki`s teachings.

There is also the matter of Asset Protection. If the corporation is on title and a tenant decides to sue the owner, who gets sued - the corporation or the person(s) owning it?

 

[Thomas Beyer]

QUOTE (OlegP @ Oct 28 2009, 09:02 PM) ..

There is also the matter of Asset Protection. If the corporation is on title and a tenant decides to sue the owner, who gets sued - the corporation or the person(s) owning it?
You can sue anybody .. like any member of this forum for slander or libel .. the question is: will you win ?

The purpose of a LIMITED company is that it is LIMITED in its liability .. usually to its assets .. unless you can prove fraud or gross negligence .. but of course a law suit usually also names the main guy/gal/president/owner of the company .. but it is hard to reach that person unless:
a) GST issues - directors of a corporation are liable
b) income taxes or payroll deductions - directors of a corporation are liable
c) fraud or gross negligence

Therefore, in most cases, a bank requires a personal guarantee of the major corporate shareholders for a mortgage !!

The KISS principle applies for corporate setup too !

 

[Nir]

QUOTE (OlegP @ Oct 28 2009, 09:02 PM)
This is one of the most hotly debatd issues. After reading about it a lot and talking to a number of investors including accountants, I am still confused, as there seems to be a lot of "if..then" statements. I read about a three-corporation approach with a Holding Company incorporating a Management company, which in turn incorporates a Property owning company. Shifting dividents around these companies apparently minimizes taxes. I believe there is a thread in this forum which describes this concept based on Robert Kiyosaki's teachings.



There is also the matter of Asset Protection. If the corporation is on title and a tenant decides to sue the owner, who gets sued - the corporation or the person(s) owning it?






Is this the thread you referred to? would be nice to get some more feedback:



http://myreinspace.com/search/public_forums/Real_Estate_Discussion/62-13141-65834-3-Tier_Cash_Flow_Model_Holding_RE_and_PM_Companies.html#65834

 

[Retreaters]

Thanks for all of the great replies, lots to read up on!

 

[OlegP]

QUOTE (investmart @ Oct 29 2009, 07:32 AM)
Is this the thread you referred to? would be nice to get some more feedback:



http://myreinspace.com/search/public_forums/Real_Estate_Discussion/62-13141-65834-3-Tier_Cash_Flow_Model_Holding_RE_and_PM_Companies.html#65834




That's correct,Neil! Thank you.



Were you able to find out more?