Is It A Bad Idea To Hold Real Estate In A Corporation?

holding real estate in a corporationI recently read an article (that I won’t link to) that was written by a tax lawyer as a case against holding property in a corporation. I’m not sure if he is an accountant or a lawyer but I believe he is a tax lawyer because his perspective is not unusual from that particular camp.

“Don’t hold real estate in a corporation, the rates are higher if you do it that way! You should be using other types of trusts, partnerships, joint ventures or holding it personally.”

By most considerations, this appears to be a perfectly rational position to take but it entirely misses the point. The proper structure shouldn’t result in any income that is left in the corporation that is subject to high rate tax. Instead, you should funnel it off to your management company.

Backing Up A Second

Before I continue any further, it’s important that you read my previous article on Best Practices When Setting Up Real Estate Investments. You’ll need to understand my point of view a bit better before you can fully understand why the advice this particular tax lawyer was giving out is worth ignoring.

It’s Not All About Numbers

If you look at just the numbers, owning real estate in a corporation is the wrong answer. That is, if you’re just looking at the numbers. The problem is you shouldn’t just look at the numbers! There are other reasons and other planning opportunities for you to ensure that the small amount of additional taxes you’re going to pay are going to be offset by the benefits of your real estate being held in a corporation.

The Opposition

The argument against holding real estate in a corporation is a true numbers-based argument. Basically, those who argue this perspective say that if you run the numbers through the Canadian Tax Act right now based on a high rate personal tax, high rate corporate tax and all the assumptions that we use when we do our planning – it makes sense to hold real estate personally.

Some even say that you should get any property out of a corporation immediately if it’s currently being held there.

I couldn’t disagree more.

On a pure technical basis, that is correct. On a practical basis, there are other ways of making sure that you reduce your taxes within the corporate structure using management techniques, amortization and things that allow you to safely defer taxes. That deferral of taxes is going to allow you to benefit from holding and paying the “higher tax rate” in a corporation for real estate investments. This is the case with all investments, not just real estate.

It’s Not Just About Taxes

The main thing to remember here is that I’m integrating an active business company with my real estate. I believe that people should provide the services for their real estate company through an active business. The people who argue against holding real estate in a corporation will never mention this point.

If you’re passively holding real estate and just looking at the numbers, it’s correct that holding real estate in a corporation is a bad idea. The problem is when you are actively involved in real estate because there are other ways of getting your taxes down.

How You Won’t Pay Those High Corporate Taxes

You want a corporation to hold your commercial real estate, another corporation to hold your residential real estate and you want a holding company that owns both of these in addition to a company that provides management services to these companies. That’s the big difference.

You can’t compare apples with oranges. I’m NEVER going to pay taxes at the highest corporate rate because I’m going to strip out reasonable management fees to an operating company.

Now, the opposition could argue that it makes sense to setup a corporation to handle the management fees while holding the real estate personally. You can do it this way but the problem is that, in business, people think corporate structures and think corporately. When you get into those types of structures, few people have the knowledge-base to actually service it. If you walk into a bank and say, “I’ve got a partnership.” They don’t know what it is but if you say you have a corporation, they understand.

It is my belief that the corporate structure allows for you to grow in a more traditional business-sense and the tax differential is small enough to not worry about.

Don’t Run Your Business Based On Taxes

Don’t run your business based on taxes, run your business based on the right business motives. I do not want to personally hold multi-millions worth of real estate in my own name because the risk is far too high.

If you’re buying one or two properties, it’s okay to not setup them up inside a corporate structure. If you plan on buying multiple investment properties over time, then you’ll want to create the proper structure as early as possible before you outgrow your original plan.

This is why it’s really important to see your real estate advisor before you make any decisions.

If anyone tells you to get your property out of a corporation, go and talk to your real estate advisor about why it’s in there in the first place before you make any decisions. If you are running a passive real estate business then perhaps it is a good idea to hold it personally because your risk is so low that it doesn’t matter.

If you own something larger than a couple properties, believe me when I say that amount of personal risk is simply not worth it.

There is no one-size-fits-all approach and every situation is truly unique. At the end of the day, consult your advisor.

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