Real Estate investments can be held two ways:
Personally – The properties are held in your name personally.
Within a Corporation – The properties can be held in either an existing operating company, a holding company or a property company.
Depending your type of situation in the investments, then I would recommend the following:
- You are going to dabble in real estate with very few properties. In this situation, the simplest method would be to hold the property personally. In this situation, you would:
- Purchase the property in your name and the obtain financing personally.
- You would report the net income on property annually in your personal tax return.
- In the year the property is sold, you recognized a capital gain or loss on your personal return and pay the associated taxes at your personal tax rate.
- You plan to be in the business of real estate investing by purchasing multiple properties. In this situation, you’ll want to consider holding the properties within a corporation. The advantages of this type of structure are:
- there is much less liability risk in the holding company because it holds shares of companies with no direct assets. The “property” company and the operating company are the risk companies, meaning if something goes legally wrong, you cannot be held personally legally liable.
- you have the ability to defer some of the taxes owing by paying wage bonuses and/or dividends at later dates, not automatically in the year the sales transaction occurs.
The types of corporations are as follows:
- Operating Company – Setup to control the business operation and your day-to-day project management. All your active business components are within this company and also your risk.
- Holding Company – This is for building your family wealth. The holding company owns the operating company so we can strip residual income up into the holding company on a tax-deferred basis via dividends and then allow the holding company to acquire assets.
- Property Company – The use of this is for acquiring real estate on behalf of the holding company. Each property with a significant amount of risk may need its own company so that it does not put the others at risk.
How can this be set up?
This can be done in steps and it doesn’t have to happen all at once. The starting point depends on the size of the building you’re buying and the type of property management you’re doing.
Make sure you take records properly and that you’re reporting to your bank, mortgage holders and Revenue Canada appropriately. If you’re committed to being in the business of real estate investing and you’re in it for the long haul, work with your advisors to setup the proper structure the first time. Although this isn’t a system for someone that’s dabbling, it can be a serious benefit to real estate investors that want to grow their portfolio over time.
