# Income Property should I Incorporate?



## skoobyroo (Mar 2, 2011)

Hi everyone, I'm about to take the plunge into an investment property and was wondering if I should buy the property under my numbered company or under my own name? Let's say I plan to be in the highest tax bracket in the future, will I be taxed more as a corp or as an individual in the highest tax bracket?

Also, if my tenants decide to sue me one day for some unforseen situation will my current residence be at risk if I have the rental property under my own personal? I've got this limited corp created already so it won't cost me anything...well maybe the tax filings are more expensive for corps but that I can handle. Seasoned landlords please help me here. I also plan to buy more real estate in the future so will having all my properties under one company help?


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## FrugalTrader (Oct 13, 2008)

You should verify with an accountant, but I believe that rental income is considered passive within a corporation, thus taxed at the highest corporate rate ~50%.


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## sprocket1200 (Aug 21, 2009)

frugal is right. i also think ideally you would own the shares of you main holdco, then have that holdco own the shares of the RE holdcos. this way you have the most flexibility and protection.


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## LondonHomes (Dec 29, 2010)

I would agree that your best to incorporate to protect your personal assets.


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## I'm Howard (Oct 13, 2010)

Why would anyone want to be a Landlord with all its' hassles when you can own REITS, get professional management and as good or better return versus ownership?

One bad Tenant can be very costly.


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## Montrealer (Sep 13, 2010)

> Why would anyone want to be a Landlord with all its' hassles when you can own REITS, get professional management and as good or better return versus ownership?
> 
> One bad Tenant can be very costly.


I disagree with you, REIT's are good for people who cannot afford a big down payment and don't have the financial means to buy an invetment property with 10%+ down.

REIT's = Virtual money invested in real estate across the country 
Investment property = Bricks and mortar investment as a business

In regards to the original question in the thread, I always tell all of my clients to incorporate every building they have as a seperate incorporation and make them sub-companies of a hilding company.


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## GeniusBoy27 (Jun 11, 2010)

I agree with Montrealer. +1. Incorporate each building separately, and have an overarching holding company.

Re: I'm Howard. I much prefer owning real estate, and I doubt any REIT can equal my return on investment. Of course, the key is, you must be patient and pick off undervalued real estate so that your ROI is extremely high. When your property holding become reasonably sized, and if you factor in vacancy, the variance (on a percentage basis) becomes less.

There are of course, pros to REITs. If you don't want to get your hands dirty, and you want, in general, nice returns ... go to REITs.


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## reccoso (Dec 16, 2010)

GeniusBoy27 said:


> I agree with Montrealer. +1. Incorporate each building separately, and have an overarching holding company.
> 
> Re: I'm Howard. I much prefer owning real estate, and I doubt any REIT can equal my return on investment. Of course, the key is, you must be patient and pick off undervalued real estate so that your ROI is extremely high. When your property holding become reasonably sized, and if you factor in vacancy, the variance (on a percentage basis) becomes less.
> 
> There are of course, pros to REITs. If you don't want to get your hands dirty, and you want, in general, nice returns ... go to REITs.


Here's an amateurish question regarding real estate investment.

Is it not a good enough investment to simply buy a house, rent it out so someone else pays off your mortgage in 15-20 years, and all you needed was your original down payment. As long as house prices stay on par with inflation, is that not a good enough scenario? 

Thanks


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## iherald (Apr 18, 2009)

reccoso said:


> Here's an amateurish question regarding real estate investment.
> 
> Is it not a good enough investment to simply buy a house, rent it out so someone else pays off your mortgage in 15-20 years, and all you needed was your original down payment. As long as house prices stay on par with inflation, is that not a good enough scenario?
> 
> Thanks


sure that's an ideal situation. The problem is that it is harder to find a house you can rent for the same as your mortgage plus taxes, utilities and upkeep. If you can do it, sure that's great.


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## sprocket1200 (Aug 21, 2009)

Montrealer said:


> I disagree with you, REIT's are good for people who cannot afford a big down payment and don't have the financial means to buy an invetment property with 10%+ down.
> 
> REIT's = Virtual money invested in real estate across the country
> Investment property = Bricks and mortar investment as a business
> ...


Montrealer is right, especially with RE gaining atleast 25% a year. everyone should jump in now. don't forget how hard realtors work for their money...


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## GeniusBoy27 (Jun 11, 2010)

reccoso said:


> Here's an amateurish question regarding real estate investment.
> 
> Is it not a good enough investment to simply buy a house, rent it out so someone else pays off your mortgage in 15-20 years, and all you needed was your original down payment. As long as house prices stay on par with inflation, is that not a good enough scenario?
> 
> Thanks


You're talking about a cash flow positive/neutral house. In theory, it sounds nice, but if it was that easy, evereyone would be doing it.

The vast majority of properties aren't cash flow positive. Only about 1-2% of them are ... so you really need to scan to pick them out. You also need a fairly large deposit as a property owner these days, so it takes a little more effort, but it's not impossible.


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## Quotealex (Aug 1, 2010)

Montrealer said:


> I always tell all of my clients to incorporate every building they have as a seperate incorporation and make them sub-companies of a hilding company.


I was advise against setting up a separate incorporation per property as it is considered passive income and would be tax at the maximum rate (unless you employ at least 3 full time employees). I was told instead to set up a management company and have it manage all the properties.


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## donald (Apr 18, 2011)

I looked into this not long ago,my banker told me i had to incorporate another company and could not put it into my exsisting # company.

Im still not sure if this is the striaght goods,i cant understand why you have to spend the 3-4 k it can cost to inc and register so you can hold 1 investment property,your starting behind the eight ball and the "game" hasnt even started.

I wouldnt inc for 1 income property,you need at the very least 2-3 so it would make sense,other wise i think your better not too,but i aint sure,cant see the business sense in it.


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## marina628 (Dec 14, 2010)

I have 5 investment properties and hold them all personally.After expenses I am netting about $4000 per property a year.By the time i pay an accountant $2000+ a year to do a set of corporate taxes I may as well just pay the income tax.


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## kcowan (Jul 1, 2010)

I think the dea of incorporating for each property is based on separation of liablility so that one property can go south and not impact the others. The remedy for this is to buy prudently like Marina does.


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## donald (Apr 18, 2011)

I know buebeland would know the proper way of this.
I just cant understand why someone would inc each income property,if you have a portfolio of a few,yes i can see why you would,and just in my mind why wouldnt you be equally protected under one inc for a few?Your still personally unattached to your property.

I think if you just bought 1 income property,likely your just starting out,dont know what to expect,id take a gander a large percentage of people who try out the renting game findout a)there not cut out for it B)they didnt realize the headaches c)there not going to sit back and make easy money and on and on,im wondering if its similar to small business as in only 50% make it after five yrs.

I know the one thing thats keeps me hesitate in wanting to get a rental is everything i read about landloarding from landloard and a few i know and have contracted work from all have the samething to say and its headaches,headaches and more headaches,i dont know if landloards are just programed that way but they sure dont make it sound easy,or stress free.


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## Berubeland (Sep 6, 2009)

There is no particular rule, usually people with larger properties - 1 million plus are incorporated and landlords with just one property hold it personally. 

As Marina noted incorporation is expensive to maintain and in many cases it's actually cash flow negative after unexpected repairs and stuff. 

It may also depend on your existing needs and if you're a high income earner and so on and what your plans are, how many properties you want to own and so on. 

Each property of a certain size gets its own corporation. The reason for this is upon the sale of the property it's simpler. 

I can't say you really should contact an accountant.


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## chaudi (Sep 10, 2009)

Since we're on the topic. I was wondering about capital gains tax. 
If you live in the house or building as a principle residence, is it correct that you don't pay tax on the gains? It seems this would be far more profitable for a landlord. I wonder what happens if the LL lives there for say 10 years then moves out or back in?


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## GeniusBoy27 (Jun 11, 2010)

Sorry, I've been away for a bit. But I think incorporation only makes sense when you have a portfolio of properties, and not when you have a few. Where that cut off is dependent on your properties, and how many people you have working for you to maintain the properties, etc.

But I also think the other issue is the liability risk, which I don't want tied to my principle property.

Chaudi: IF you read CRA's rules on that. You get the capital gains free period for only the portion that you lived in the property. Somehow you should quantify when those breaks occur by hopefully a real estate appraiser (for clarity to CRA, but probably a real estate agent may be sufficient -- to clearly define fair market value as each period of time.)

For example, if you bought a property for $100,000 -- lived in it for 2 years, it's now worth $125,000; then you decide to rent it out for 2 years, and now it's worth $150,000, and you move back in ... in 4 years, you decide to sell at $200,000

$100 to $125K -- principle residence
$125 to $150K -- not principle residence
$150 to $200K -- principle residence

For the portion that it wasn't the principle residence ($125 to $150K) is a $25K difference. You need to pay capital gains on that portion.


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