To incorporate, or to not incorporate? This is probably one of the top questions that we get asked, and the problem is that there is no simple answer to it. Like most things in life, it really depends on your circumstances! In this article we will go into the positives and negatives regarding incorporating your real estate investing business, then ultimately you can decide what work best for you.
1. Some limited liability. Although not a whole lot, you will still be slightly more protected than if you hold property in your personal name.
2. The ability to hide who actually owns the property. This is probably the biggest reason for incorporating, as there can be many reasons for not wanting the world to know that you own that piece of property. In the Province of BC, it can be very tough to actually track down who the shareholders are for a corporation. Not so much in Alberta, but it still adds another level that someone would have to go through.
3. Ease of swapping shareholders vs. transferring title. In certain Provinces (like BC) with property transfer tax, it can be much simpler to swap the shareholders in certain situations that actually transferring the title and paying the tax.
4. Being incorporated adds a certain level of sophistication to your business, and will likely be required at some point once you hit a certain size.
5. Incorporating your real estate business makes you look more professional. Sometimes, these things matter in life, and if you are incorporated, the perception is that you are more professional.
1. It’s more expensive to do so. You will have to file year-end returns and generate financial statements, which is going to cost you way more in accounting fees.
2. You will no longer be able to offset personal income if you are running your rental property at a loss. For example, if you earn an annual salary of $60,000 per year, and then show a rental loss of $10,000 under your personal name, you are then only paying tax on $50,000 of income.
3. There is no huge advantage when it comes to taking out a mortgage. Even if your company is purchasing a property and taking out a mortgage, you are likely still going to have to sign a personal guarantee.
4. For single-family properties, most residential mortgage companies will no longer allow you to purchase in a company name, so this may not even be a viable option. For multi-family or commercial real estate, you will be looking at a commercial mortgage, so this will be fine.
5. Forget the tax advantages! Passive income (which rental income is) generated inside of a corporation is generally taxed at a higher rate than your personal rate.
Hopefully these pros and cons regarding whether or not to incorporate your real estate investing business help a little, and at the very least give you some food for thought. We really recommend talking to a tax professional prior to doing anything, though.
Contact our real estate and property management company here for more advice!
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