People seem to love corporations. Most figure there must be some advantage in using them; and often there is. However, everyone’s situation is different. Certain circumstances must be present in order to allow us to tap into these advantages.
In my practice I see, far too often, corporations created too early, or even unnecessarily. When a corporation is useful, massive tax deferrals could be available. If a corporation is not useful, you may not be worse off tax-wise (i.e. you won’t end up paying extra taxes), however, you will incur additional legal and accounting fees with no added value. It is important to understand when, and how, to use a corporation.
In this article, we are specifically speaking about investment real estate and if it’s a good idea to purchase this in a corporation or not.
The primary consideration is: where is the money that is to be used to purchase this real estate? If you are using personal money, it is rare that putting money into a corporation to purchase investment real estate would result in a preferred tax result. This is because the annual net tax cost of rental income, and eventual capital gains, will be similar in a corporation compared to being taxed in your personal hands.
But, we see all these holdings companies being set up to hold real estate and other corporately held investments!? How and why is this done??
Self employed people who run their active businesses through a corporation pay very little taxes on profits left inside the corporation. Holdings companies are thus created to hold these corporate profits. The shareholders/directors of the Holding company are free to invest these corporate funds as they please; and often, these funds are used to purchase corporately held investment properties.
This example covers the most common and simplest set of circumstances used to determine whether owning investment properties corporately is advantageous. However, other circumstances may exist. It is advisable to seek professional advice to review your personal set of circumstances.