Are you wondering whether you should buy an investment property through a corporation or your personal name? It’s actually more than a single-line answer. It’s a very popular question asked by real estate investors and it’s hard to have one answer to that question without analyzing the client’s circumstance individually. However, there are a few concepts that you should be aware of beforehand if you are considering purchasing a property with a corporation in Canada.
What is a Corporate Real Estate?
Corporate-owned real estate refers to property owned by a business that may be a form of investment or operational need. Corporate real estate means that the title of the property as legal ownership remains with the corporation rather than in a personal name. It may involve a business having a main location of operation, retail locations, as well as manufacturing sites. In addition, corporate-owned real estate can involve designing, constructing, renovating, and managing a property for the sake of the business's future. The reason why homeowners prefer corporations to hold properties rather than holding them personally includes ease in corporate tax returns, financing, legacy planning, and legalities amongst many more.
The Advantages and Drawbacks of Corporate-Owned Real Estate
Whether a business is looking to own property or already owns it, it is nonetheless useful to know the pros and cons of corporate-owned real estate.
Advantages of Corporate-Owned Real Estate
1. Real estate is intrinsically valuable
Corporations that own real estate can benefit from the fact that property always has an intrinsic value. Real estate is not only sought after by other businesses looking to stake a claim in a market. In fact, real estate can also appreciate over time. For instance, a business can take advantage of a property being sold at a discount, invest in it, and ultimately resell it for a higher price. Discount properties may occur due to several reasons such as the need to close and liquidate assets, or even a growing business needing to make the move to a new location.
2. Limited Liability Protection
Certain types of properties such as a commercial property rented out, in general nature have a higher risk liability compared to suppose a residential rental property. By purchasing the property inside a real estate corporation, your personal assets such as your home and vehicles are protected. The one-time cost of incorporation will easily become justified if you ever encounter a lawsuit, however, it will increase your accounting fees each year. If your property has risk involved, it is something to consider.
3. Tax Benefits
Unique tax benefits exist for a business that owns real estate. For instance, this can encompass tax reductions and tax-deductible expenses by virtue of requiring the property to run one’s business. These tax benefits have effects on the long-term goals of a business due to factors such as depreciation and the need to check on the property. These tax benefits may range from small to big businesses.
4. Capital Gains Exemption
If you own corporate real estate 50% of the capital gains are free of tax, if you are earning rent or any other kind of capital gain from the property you must pay a tax of 50.2%, corporate tax returns add up to approximately 30.7% they can be refunded once the profits of the corporation are paid out. Corporate real estate is required to fill in a corporate tax return annually, you can choose the year-end date that you wish to be the time of declaration.
Filling out the corporate tax return form can be a little tricky and requires many supporting documents, you can get help from a professional accountant with the completion of the forms. You must make sure you have the documents such as your expense receipts and monthly bank statements. Having these documents handy will help you complete your claim quicker in case of a review by the CRA.
5. Freezing of an estate and planning succession
If you purchase property under a corporation one of its major benefits is that you can keep your estate taxes to a minimum. If you plan on growing a decent-sized investment portfolio and would like to minimize your estate taxes and pass on property to families, corporate structures and certain elections under the income tax act offer the most flexibility. You can also easily pass on your estate to your family, this kind of legal title offers maximum flexibility. This is particularly useful if you are planning to extend your investment portfolios.
Disadvantages of Corporate-Owned Real Estate
1. Requires funds to purchase
To acquire real estate, one must have the funds to do so in the first place. This may involve down payments, property repair costs, renovations, as well as the purchase of furniture and equipment to maximize the income gained from tenants. This is in addition to maintenance and insurance costs. Finding the right plan for one’s business can be a lengthy, difficult, and expensive process in and of itself. However, with the help of an expert, business owners can obtain all the information they need before making such a huge decision.
2. Real estate consumes time
Finding and maintaining real estate to invest in can be a challenge that takes up a lot of time. For instance, to ensure that one’s property is being treated well by tenants, one has to hire others to check up on the location periodically. Moreover, if one is new to real estate investments, then their bottom line may be affected negatively. Therefore, business owners who are interested in owning real estate must get ahead of the learning curve as quickly as possible. At times, this may not be possible due to the nature of the business and one’s schedule.
Conclusion
Although you can incorporate a company on your own, we recommend getting it done professionally with a lawyer or accountant to avoid potentially costly mistakes. Once the corporation is set up, you will also require to prepare annual corporate tax returns which are separate from your personal tax returns. To get the most out of a corporate-owned real estate, a business owner must be knowledgeable of the pros and cons. Every business is unique in terms of circumstances and funds. That is why the experts at Filing Taxes will be happy to assist business owners in this pursuit. To speak with an experienced accountant, contact Filing Taxes either at 416-479-8532 or [email protected]. Schedule an NTR engagement appointment with us and take the first step towards proper management of your finances.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.