Incorporating in Real Estate
- Thread starter blusky
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QUOTE (blusky @ May 7 2010, 05:19 PM)
Are there any benifits that would come out of incorporating into a business for investing in real estate over long term?
insight on older REIN threads here: 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
Are there any benifits that would come out of incorporating into a business for investing in real estate over long term?
insight on older REIN threads here: 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
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QUOTE (blusky @ May 7 2010, 07:19 PM) Are there any benifits that would come out of incorporating into a business for investing in real estate over long term?
I wrote an article on this recently. It`s essentially written on how to phase into (transition to) using corporation(s) to own real estate. Email me I`ll send it [email protected] (I hold 40% privately and 60% corporately).
I wrote an article on this recently. It`s essentially written on how to phase into (transition to) using corporation(s) to own real estate. Email me I`ll send it [email protected] (I hold 40% privately and 60% corporately).
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QUOTE (TomRebstock @ Jun 11 2010, 06:42 PM) I wrote an article on this recently. It`s essentially written on how to phase into (transition to) using corporation(s) to own real estate. Email me I`ll send it [email protected] (I hold 40% privately and 60% corporately).
why not share it here ?
why not share it here ?
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I agree,
I am curious about what your article says.
I am curious about what your article says.
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[quote name=`ThomasBeyer` date=`Jun 11 2010, 11:51 PM` post=`87457`]why not share it here ?
Sure I can post it here. I`m writing some content now for a web site of mine yet to be developed. I wrote it as a stand alone piece to a beginner audience. It`s longer then something I would normally post on this forum.
MOST IMPORTANTLY IN ANY REAL ESTATE BUSINESS, IT IS THE REAL ESTATE (PROPERTY) AND THE TENANTS THAT ARE THE BUSINESS. THE OWNERSHIP STRUCTURE IS MERELY A METHOD OF OWNERSHIP THAT CAN EFFECT THE OVERALL EFFICENCY OF FINANCIAL RESULTS (BECAUSE OF THE TAX LAWS AND HOW THEY CAN BE APPLIED IN YOUR FAVOUR).
TO REPEAT. IT IS THE PROPERTY, THE TENANTS, AND THE BUSINESS SYSTEMS WE USE THAT ARE THE BUSINESS, NOT THE OWNERSHIP STRUCTURE. (ie. spend time on the business, much less time on the ownership structure).
It is also my observation that often people can get caught in it has to be one way OR the other. Whereas it can be both. I hold 50% private - 50% incorporated (not a model, rather these are my results).
Also going from no corporation IMMEDIATELY to three CORPORATIONS is not inherently a requirement (a bit complicated and yes there are direct costs (startup ($3,000 and annually (2,500)). This effort can have stages and can be done in transition rather than ALL AT ONCE.
What I have not written is a "how to" on the actual structure or the inter-company transactions required (Talk to your favourite accountant) !
And my last preface is I am an investor. I`m writing about my own point of view and what I learned (first I strugggledm mightily) along the way.
I do welcome any comments you may have. I hope if you end up using these ideas that they serve you very well.
SHOULD I INCORPORATE TO HOLD REAL ESTATE?
Should I incorporate to hold real estate ?
In other words. If I wish to defer or reduce the amount of taxes I would pay as a real estate investor will I need to incorporate ? And if so when ?
My experience is that its people that don’t own any real estate that ask this question most frequently. Good question !
When preparing to acquire real estate the first thing to do is to build a team of professionals that own investment real estate or professionals that have as a core part of their professional practice real estate investors as major clients. Just to make my point answer this: if you were having eye surgery would you hire anything but the most experienced professional you could find ? I doubt it very much! It’s common sense, wouldn’t you agree? Oddly many people miss this key first step.
So having an accountant on your team with experience with real estate investors is part of your first steps. The easiest way to locate one is ask an investment savvy investor, mortgage broker, or realtor you might know if they recommend someone. Contact me if you don’t know any.
Ask that experienced investment savvy accountant.
Ok back to the question.
Now I am not an accountant myself but an investor, here is my own opinion.
If you are only buying 1 house, then the answer is no. Done, no need to read on any further. Stop reading !
If you expect to have negative cashflow or high renovation startup costs that you want to take as deductions against your personal income tax, then the answer is no. You must hold the property personally to do this. Done, no need to read on any further.
So to be clear if you have losses on real estate that you own personally you can use them as deductions on your personal income tax. If you have losses on real estate that a corporation you control owns you cannot write any losses off period. No deductions.
-/sizeo-->
If there are benefits to owning real estate in a corporation what are they?
Lifetime Capital Gains exemption up to a limit. Plus a decrease in the tax rate from approximately 46 % (tax braket?) to 17.5 % (corporate). This is best achieved through creating three corporations in a structure referred to as three tiered (see your accountant). The second corporation will be labeled a property management company (even if you only manage your own properties !) and likely will be recognized by the CRA as an “active” business (in contrast to a passive business) which will qualify you for the above benefits.
Ok I don’t get what a 3 tier corporation is but I get the concepts, how would I start?
You must acquire ownership of property in the name of a corporation you control !
That is to say acquire 1 property in one corporation.
Ok how do I do that ?
There is a lot of mis-information about this one so ask sources you deem to be credible.
Again people commonly ask is there a break even point or a rule of thumb for how many houses own should own before doing this? The answer I believe is no there is not such a rule.
->How to hold one single home in a corporation.
Here’s what I learned. Make sure the corporation that you want to hold the property in is created first (i.e. it is named and registered). Take possession of your property in your name. Today banks will pretty much NEVER provide a mortgage to a new corporation so you’ll need to take possession in your own name. Banks would want a few years of formal financials on a corporate entity before they would lend to a new corporate entity. This next step I can’t explain why but I can tell you what works. Then after closing visit a different lawyers office (not the lawyer you used to close the original purchase) and make a legal declaration that “ It was always my intent to hold the property in the corporation”. The lawyer will present you with a written declaration to sign. Then that same afternoon you will leave the lawyers office with a new deed for the property with the ownership changed from you to the corporation you name. Don’t forget to pay the lawyer bill on the way out the door (less than $ 500.00). Done this way you will pay the Ontario land transfer fee once on the day you originally close the property. Doing it this way you will not pay land transfer tax on the day you walk out of the lawyer’s office with the new deed in the name of the corporation.
You will need a corporation (business) bank account and you’ll need to file a separate tax return annually for the corporation.
How to hold multiple properties in a corporation.
Simply repeat this process a number of times.
Now my property is in a corporation now what ?
When you are ready for the complexity, the expense of setting up the other two corporations, managing a 2[sup]nd[/sup] and 3p>rd sets of records, and the annual expense of a 2[sup]nd and a 3rd[/sup] annual tax return.
Set up a corporation as holding company (talk to your accountant). Set up a corporation as a property management company (talk to your accountant). Set up a simple one-page web site to have a public face as an active business.
Congratulations instead of paying income tax at the personal rate (minimum tax rate of 46 %) you are now taxed at 17.5 % (corporate rate for an active business corporation) AND you are eligible for a lifetime Capital Gains exemption of $ 750,000 dollars !
You’ll learn as you go. You’ll get better grasp of this every year as you grow as an investor.
Always remember in a corporation you can only reduce you tax costs from any PROFITS, not losses.
Be in real estate for cash flow profits every month and of the course the capital appreciation in the long term.
If you have losses you are better off holding property personally for the reduction in your personal income tax.
Happy investing,
Tom Rebstock
Western Lantern Inc. (President)
Brekland Realty Group (Representative)
ec-->
[email protected]
Sure I can post it here. I`m writing some content now for a web site of mine yet to be developed. I wrote it as a stand alone piece to a beginner audience. It`s longer then something I would normally post on this forum.
MOST IMPORTANTLY IN ANY REAL ESTATE BUSINESS, IT IS THE REAL ESTATE (PROPERTY) AND THE TENANTS THAT ARE THE BUSINESS. THE OWNERSHIP STRUCTURE IS MERELY A METHOD OF OWNERSHIP THAT CAN EFFECT THE OVERALL EFFICENCY OF FINANCIAL RESULTS (BECAUSE OF THE TAX LAWS AND HOW THEY CAN BE APPLIED IN YOUR FAVOUR).
TO REPEAT. IT IS THE PROPERTY, THE TENANTS, AND THE BUSINESS SYSTEMS WE USE THAT ARE THE BUSINESS, NOT THE OWNERSHIP STRUCTURE. (ie. spend time on the business, much less time on the ownership structure).
It is also my observation that often people can get caught in it has to be one way OR the other. Whereas it can be both. I hold 50% private - 50% incorporated (not a model, rather these are my results).
Also going from no corporation IMMEDIATELY to three CORPORATIONS is not inherently a requirement (a bit complicated and yes there are direct costs (startup ($3,000 and annually (2,500)). This effort can have stages and can be done in transition rather than ALL AT ONCE.
What I have not written is a "how to" on the actual structure or the inter-company transactions required (Talk to your favourite accountant) !
And my last preface is I am an investor. I`m writing about my own point of view and what I learned (first I strugggledm mightily) along the way.
I do welcome any comments you may have. I hope if you end up using these ideas that they serve you very well.
SHOULD I INCORPORATE TO HOLD REAL ESTATE?
Should I incorporate to hold real estate ?
In other words. If I wish to defer or reduce the amount of taxes I would pay as a real estate investor will I need to incorporate ? And if so when ?
My experience is that its people that don’t own any real estate that ask this question most frequently. Good question !
When preparing to acquire real estate the first thing to do is to build a team of professionals that own investment real estate or professionals that have as a core part of their professional practice real estate investors as major clients. Just to make my point answer this: if you were having eye surgery would you hire anything but the most experienced professional you could find ? I doubt it very much! It’s common sense, wouldn’t you agree? Oddly many people miss this key first step.
So having an accountant on your team with experience with real estate investors is part of your first steps. The easiest way to locate one is ask an investment savvy investor, mortgage broker, or realtor you might know if they recommend someone. Contact me if you don’t know any.
Ask that experienced investment savvy accountant.
Ok back to the question.
Now I am not an accountant myself but an investor, here is my own opinion.
If you are only buying 1 house, then the answer is no. Done, no need to read on any further. Stop reading !
If you expect to have negative cashflow or high renovation startup costs that you want to take as deductions against your personal income tax, then the answer is no. You must hold the property personally to do this. Done, no need to read on any further.
So to be clear if you have losses on real estate that you own personally you can use them as deductions on your personal income tax. If you have losses on real estate that a corporation you control owns you cannot write any losses off period. No deductions.
-/sizeo-->
If there are benefits to owning real estate in a corporation what are they?
Lifetime Capital Gains exemption up to a limit. Plus a decrease in the tax rate from approximately 46 % (tax braket?) to 17.5 % (corporate). This is best achieved through creating three corporations in a structure referred to as three tiered (see your accountant). The second corporation will be labeled a property management company (even if you only manage your own properties !) and likely will be recognized by the CRA as an “active” business (in contrast to a passive business) which will qualify you for the above benefits.
Ok I don’t get what a 3 tier corporation is but I get the concepts, how would I start?
You must acquire ownership of property in the name of a corporation you control !
That is to say acquire 1 property in one corporation.
Ok how do I do that ?
There is a lot of mis-information about this one so ask sources you deem to be credible.
Again people commonly ask is there a break even point or a rule of thumb for how many houses own should own before doing this? The answer I believe is no there is not such a rule.
->How to hold one single home in a corporation.
Here’s what I learned. Make sure the corporation that you want to hold the property in is created first (i.e. it is named and registered). Take possession of your property in your name. Today banks will pretty much NEVER provide a mortgage to a new corporation so you’ll need to take possession in your own name. Banks would want a few years of formal financials on a corporate entity before they would lend to a new corporate entity. This next step I can’t explain why but I can tell you what works. Then after closing visit a different lawyers office (not the lawyer you used to close the original purchase) and make a legal declaration that “ It was always my intent to hold the property in the corporation”. The lawyer will present you with a written declaration to sign. Then that same afternoon you will leave the lawyers office with a new deed for the property with the ownership changed from you to the corporation you name. Don’t forget to pay the lawyer bill on the way out the door (less than $ 500.00). Done this way you will pay the Ontario land transfer fee once on the day you originally close the property. Doing it this way you will not pay land transfer tax on the day you walk out of the lawyer’s office with the new deed in the name of the corporation.
You will need a corporation (business) bank account and you’ll need to file a separate tax return annually for the corporation.
How to hold multiple properties in a corporation.
Simply repeat this process a number of times.
Now my property is in a corporation now what ?
When you are ready for the complexity, the expense of setting up the other two corporations, managing a 2[sup]nd[/sup] and 3p>rd sets of records, and the annual expense of a 2[sup]nd and a 3rd[/sup] annual tax return.
Set up a corporation as holding company (talk to your accountant). Set up a corporation as a property management company (talk to your accountant). Set up a simple one-page web site to have a public face as an active business.
Congratulations instead of paying income tax at the personal rate (minimum tax rate of 46 %) you are now taxed at 17.5 % (corporate rate for an active business corporation) AND you are eligible for a lifetime Capital Gains exemption of $ 750,000 dollars !
You’ll learn as you go. You’ll get better grasp of this every year as you grow as an investor.
Always remember in a corporation you can only reduce you tax costs from any PROFITS, not losses.
Be in real estate for cash flow profits every month and of the course the capital appreciation in the long term.
If you have losses you are better off holding property personally for the reduction in your personal income tax.
Happy investing,
Tom Rebstock
Western Lantern Inc. (President)
Brekland Realty Group (Representative)
ec-->
[email protected]
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well written, Tom. thank you for sharing.
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QUOTE (TomRebstock @ Jun 23 2010, 08:38 AM) ...
Take possession of your property in your name. Today banks will pretty much NEVER provide a mortgage to a new corporation so you’ll need to take possession in your own name. Banks would want a few years of formal financials on a corporate entity before they would lend to a new corporate entity...
not quite !
It is VERY common for commercial properties to be bought into a new corporation !
Even for single family homes banks lend on a single family asset held in a new corporation with a personal guarantee .. but it is far easier to get a mortgage owned personally !
QUOTE (TomRebstock @ Jun 23 2010, 08:38 AM) ...
Then after closing visit a different lawyers office (not the lawyer you used to close the original purchase) and make a legal declaration that “ It was always my intent to hold the property in the corporation”. The lawyer will present you with a written declaration to sign. Then that same afternoon you will leave the lawyers office with a new deed for the property with the ownership changed from you to the corporation you name. Don’t forget to pay the lawyer bill on the way out the door (less than $ 500.00). Done this way you will pay the Ontario land transfer fee once on the day you originally close the property. Doing it this way you will not pay land transfer tax on the day you walk out of the lawyer’s office with the new deed in the name of the corporation.
And possibly setting yourself up for mortgage fraud or for sure, breach of your mortgage terms .. as the bank lent you money personally and now the asset is in a corporation !
QUOTE (TomRebstock @ Jun 23 2010, 08:38 AM) ...
Congratulations instead of paying income tax at the personal rate (minimum tax rate of 46 %) you are now taxed at 17.5 % (corporate rate for an active business corporation) ..
Not quite either !!
Usually you depreciate an asset and thus do not pay taxes on cash-flow until you sell.
Also, a rental property is NOT considered an active business .. and as such you cannot declare this income or its gain on sale as ACTIVE business .. the only part that could be an active business is property management which is maybe 5% to 10% of rent collected although CRA might not like it if it is just your own property and could even deem that passive income !
Take possession of your property in your name. Today banks will pretty much NEVER provide a mortgage to a new corporation so you’ll need to take possession in your own name. Banks would want a few years of formal financials on a corporate entity before they would lend to a new corporate entity...
not quite !
It is VERY common for commercial properties to be bought into a new corporation !
Even for single family homes banks lend on a single family asset held in a new corporation with a personal guarantee .. but it is far easier to get a mortgage owned personally !
QUOTE (TomRebstock @ Jun 23 2010, 08:38 AM) ...
Then after closing visit a different lawyers office (not the lawyer you used to close the original purchase) and make a legal declaration that “ It was always my intent to hold the property in the corporation”. The lawyer will present you with a written declaration to sign. Then that same afternoon you will leave the lawyers office with a new deed for the property with the ownership changed from you to the corporation you name. Don’t forget to pay the lawyer bill on the way out the door (less than $ 500.00). Done this way you will pay the Ontario land transfer fee once on the day you originally close the property. Doing it this way you will not pay land transfer tax on the day you walk out of the lawyer’s office with the new deed in the name of the corporation.
And possibly setting yourself up for mortgage fraud or for sure, breach of your mortgage terms .. as the bank lent you money personally and now the asset is in a corporation !
QUOTE (TomRebstock @ Jun 23 2010, 08:38 AM) ...
Congratulations instead of paying income tax at the personal rate (minimum tax rate of 46 %) you are now taxed at 17.5 % (corporate rate for an active business corporation) ..
Not quite either !!
Usually you depreciate an asset and thus do not pay taxes on cash-flow until you sell.
Also, a rental property is NOT considered an active business .. and as such you cannot declare this income or its gain on sale as ACTIVE business .. the only part that could be an active business is property management which is maybe 5% to 10% of rent collected although CRA might not like it if it is just your own property and could even deem that passive income !
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QUOTE (westboundventures @ Jun 26 2010, 11:06 PM) well written, Tom. thank you for sharing.
.. but :
Not every "advice" on a (free) blog site is correct !
.. but :
Not every "advice" on a (free) blog site is correct !
I don`t think I have ever seen a topic filled with more disinformation then incorporating in real estate.. Everyone wants to know about it and everyone is an supposed expert, I know a few good folks who`ve been burned badly when the CRA came knocking on there door.
I do believe corporations are a good idea for investors, provided they get solid advice, if you don`t need to take the money out of the corp they can almost become like an RRSP for businesses. The tax bracket is lower and more of your money stays in the corp and can be used to expand faster.
But make no mistake the tax man will eventually get his share, likely more then if you`d never bothered with a corporation as your corporation will pay taxes and then you will pay them again in the form of income tax.
I do believe corporations are a good idea for investors, provided they get solid advice, if you don`t need to take the money out of the corp they can almost become like an RRSP for businesses. The tax bracket is lower and more of your money stays in the corp and can be used to expand faster.
But make no mistake the tax man will eventually get his share, likely more then if you`d never bothered with a corporation as your corporation will pay taxes and then you will pay them again in the form of income tax.
JSEIB,
Thanks for your post. Would you post a litlle more info on others you know who have been dissapointed with CRA`s view of their incorporation for real estate investment? Seems like a good opportunity to learn from the misfortune of those who have gone before. Thanks
Thanks for your post. Would you post a litlle more info on others you know who have been dissapointed with CRA`s view of their incorporation for real estate investment? Seems like a good opportunity to learn from the misfortune of those who have gone before. Thanks