Using a Corporation for Buying Real Estate

Are you a real estate investor ?

If you are in position of buying real estate as investment property, the question of purchasing through a corporation may have come to mind.

In the case of Corporate Real Estate, the corporation becomes the legal owner on the title of the property instead of it being under your personal name.

Even though it is a very common question among real estate investors, there are many different factors that need to be considered based on each individual’s circumstance.

It is important to be aware of the following factors when using a corporation for purchasing real estate:

1. Limited Liability Protection under a Corporation

Unlike residential property rentals, the property owner faces a much higher liability risk factor in the case of renting out commercial properties.

The benefits of using a real estate corporation to purchase your properties is the protection it offers to your personal assets, such as your home and vehicles etc.

Even though there is a cost to incorporate, and the accounting fees will be more expensive on a yearly basis, these costs will pale in comparison to the potential personal & financial disaster that can arise in the event of a lawsuit ever ensuing. Therefore, incorporating would be a wise decision to make if your commercial activity has any risk involved.

2. Real Estate Corporation Tax

It is important to note that there is no real tax advantage when owning a rental property under a corporation in comparison to owning the same property individually.

Under a corporation, rental income and capital gains (all considered to be Passive Income) are taxable at 50,2 % while 50% of the capital gains are tax free.

However, it is possible to recuperate 30,7% of the tax paid as a refund to the corporation, if the profits are paid out to shareholders as dividends.

Therefore, to reduce income tax it is advantageous to declare the profit as dividend income on your personal tax return in the same manner as if the property were owned under your individual name (but as dividends in this case).

3. Life-Time Capital Gains Exemption

There is a misconception about the life time capital gains exemption when it comes to the sale of corporate shares. The lifetime capital gains exemption of 800,000 applies only to the shares disposition of an active business corporation only, which differs from a real estate corporation, where profits are considered to be Passive Income. Therefore, it would not be possible to use the $800,000 exemption on the disposition of shares issued by the real estate corporation, that has ownership of the property, nor is it possible to benefit by adding a family trust.

4. Succession Planning

If you are looking to growing an investment portfolio and wanting to minimizing your estate taxes by transferring property to a family member, a real estate corporation structure can be highly advantageous and can offer much flexibility.

Do you own investment property or considering purchasing one or more? Contact us today and speak with one of our specialized real estate tax accountants that can certainly guide you in making the right decisions.