Owning rentals, better as business or individual?

[cidley69]

Seems many beyonders are also landlords. What are the pros/cons of owning rentals as incorporated business?

Guess it boils down to tax savings, although I know nothing about the topic.

How many people run their rental properties through a numbered company?

[Xtrema]

I did not because it's tough to deal with financing a bit more work to save 20% on income tax. And mth to mth income isn't really that great unless your amortization is low. The only major income would be cap gain when you sell and unlock the equity.

It will probably make sense if you deal with higher volumes or if you are paying down the home faster while you still have a primary income. As interest amount goes down, there may be some incentive to create a number company as property management company. You charge yourself management fees and divert funds there in lieu of lower interest payments.

[BananaFob]

Originally posted by Xtrema
I did not because it's tough to deal with financing a bit more work to save 20% on income tax. And mth to mth income isn't really that great unless your amortization is low. The only major income would be cap gain when you sell and unlock the equity.

It will probably make sense if you deal with higher volumes or if you are paying down the home faster while you still have a primary income. As interest amount goes down, there may be some incentive to create a number company as property management company. You charge yourself management fees and divert funds there in lieu of lower interest payments.

+1 It becomes a bit more complicated as a business to get financing, especially with lines of credit.

[triplep]

How many rentals are you thinking? 1? or more, if it is 1 than no it would not make any sense having it inside a corporation.


Even if you suck out money through management fees, you will pay taxes on these management fees personally, so I don't see how you would save 20% in taxes regardless.

[Sugarphreak]

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[JLau]

pretty sure you have to have min 6 employees to turn your rentals into a rental business

[Sugarphreak]

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[heavyfuel]

Originally posted by Sugarphreak
I think if you are doing more than about 3 rentals, doing it through a business just makes sense. You can write off the interest for the mortgages, also the cost of maintenance labor and tools, accounting and cleaning costs could all be written off against the income.

The big reason you would do this is for liability; by using a limited liability company, at least if something happens that sinks your business your personal assets and income are all separated and protected.



You are obligated to pay tax either way, however if you were to take dividends instead of wages out of the company it has a slight tax advantage.

Obviously I don't know a thing about this subject but afaik in general you don't HAVE to be inc'd or ltd to write off these things, so long as it's directly related to income. I mean are you really gonna make over 130k year net with 4 or 5 properties? Hell no so why bother incorporating?

Sure your personal assets are protected if something sinks your business but then again those problems don't just dissipate into thin air, somebody has to clean that mess up and that somebody is you. Sounds like more headaches than it's worth. I'm still patching up a 2009 incorporation fuckup. Never again.

I did a comparison for 2012, and in my case I would have paid MORE had I been incorporated. The few bucks I would have saved on dividends would have gone straight into my CA's pockets. It's a license to steal from an accountants perspective, gotta factor that in too.

[Sugarphreak]

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[heavyfuel]

Originally posted by Sugarphreak


You are right, you can’t write off anything if it isn’t setup through a business. I don’t really follow your logic around not incorporating though, who cares if you are only making 40K… the expenses of renting can be pretty substantial, and small businesses pays a flat tax, why wouldn’t you take advantage of it?

As far as separating your personal and business liability goes, is just a smart thing to do… if something goes really sideways with your rental and you end up being on the hook for serious liability as a result, it gives you the ability to walk away without losing everything. If it is personal, it ruins your life.

40k is no reason to incorporate IMO. Like I said any money you'll save on taxes is going straight into the accountant's pockets. Cost me $200 for 2012, inc'd he would have charged me over $2000. Numbers are numbers and if that's not gouging I don't know what is.

I don't get how you just "walk away", I'm sure not walking away from my 2009 fuckup.

[GTS4tw]

Originally posted by heavyfuel


40k is no reason to incorporate IMO. Like I said any money you'll save on taxes is going straight into the accountant's pockets. Cost me $200 for 2012, inc'd he would have charged me over $2000. Numbers are numbers and if that's not gouging I don't know what is.

I don't get how you just "walk away", I'm sure not walking away from my 2009 fuckup.

Wow, your accountant is ripping you off. If it is the same business, but just inc'd it shouldn't really make much difference. Or at least it hasn't for me, having run a similar business to yours both as a proprietorship and inc'd. If you are Inc, then your personal bank accounts and property are not on the line in the event of bankruptcy, or lawsuit. There are other benefits too, but it all depends on the individual and business.

[tpurcell4]

If I can weigh in from the mortgage side of the equation, less than 3 properties probably not worth incorporating, you can if want, but not really necessary. With most mortgage lenders they will allow individuals to hold only 3-4 properties. Others will allow you to have as many as you want, and will only expose themselves as a lender to a maximum of 3-4 properties. Most lenders consider that once you grow beyond this number of properties it is a business and should be done commercially.

If you do not plan to ever exceed this number of properties then you will need to weigh in if the property is going to put enough cash in your pocket every month to warrant the extra costs of incorporating. Most single family homes, especially in Calgary may bring in enough income to service the debt, and regardless of being incorporated or not (if any accountants are out there please verify) you can write off the interest portion of your mortgage payment, which should offset most of your tax liability for the property.

If you actually want to make of a business of property investment by building a rental portfolio (not just buying and flipping) then you may want to seriously consider incorporating. You will also want to look at properties with multiple units for better cash flow. Once your corporation has 3 years in business and acquiring and has positive cashflow and can purchase and service the properties you can start looking at larger investments that will really pay off. If you are purchasing commercial property such as small apartments 5 units or more typically, CMHC insured loans come very cheap and sometimes at even lower rates than residential.

Sorry, have to run to an appointment, if I missed anything I apologize and will clarify further later if needed!

Cheers,

Todd

[triplep]

Originally posted by Sugarphreak


Where exactly are you getting that from? How would you pay employees if you didn't have a business setup?

I run a limited liability business myself and it has one employee... me.


I think what he meant was that you need a minimum of 5 full time employees for it to be considered active business income, otherwise, it doesn't matter how many rental units you have, it is considered passive income (AII). Since it is AII, you aren't eligible for the small business deduction, so you end up paying more in taxes, and on top of that you also need to pay refundable taxes.

[JLau]

Originally posted by triplep



I think what he meant was that you need a minimum of 5 full time employees for it to be considered active business income, otherwise, it doesn't matter how many rental units you have, it is considered passive income (AII). Since it is AII, you aren't eligible for the small business deduction, so you end up paying more in taxes, and on top of that you also need to pay refundable taxes.

Thank you.

[yellowsnow]

Even if you are buying a house in an incorporated company, don't you need to have a personal guarantee on the home?

Also, doesn't the incorporated company need to be classified as a holding company? That's what I always assumed.

[liquid1010]

Originally posted by yellowsnow
Even if you are buying a house in an incorporated company, don't you need to have a personal guarantee on the home?

Also, doesn't the incorporated company need to be classified as a holding company? That's what I always assumed.

Usually they will ask you to personally guarantee the property (especially for your first few properties).

With regards to the second comment; Holding companies are simply corporations that hold shares in other operating companies (corporations). People will use these for tax planning or investment reasons. ie: My Opco will hold the properties and then distribute the income tax free via a dividend to the Holdco. The Holdco can then invest that income in other businesses, etc.

[revelations]

BUMP ***

Im already inc. for business purposes right now. Just wondering if its worth the mortgage and legal costs etc. ($1500?) to move an existing rental property under the corporation.

My accountant seemed to think so but just wanted a second opinion.

The property is generating only about 1-200$ month income.

[CapnCrunch]

Originally posted by revelations
BUMP ***

Im already inc. for business purposes right now. Just wondering if its worth the mortgage and legal costs etc. ($1500?) to move an existing rental property under the corporation.

My accountant seemed to think so but just wanted a second opinion.

The property is generating only about 1-200$ month income.

What reasons did your accountant give you for switching it over?

[TimLacroix]

Originally posted by revelations
BUMP ***

Im already inc. for business purposes right now. Just wondering if its worth the mortgage and legal costs etc. ($1500?) to move an existing rental property under the corporation.

My accountant seemed to think so but just wanted a second opinion.

The property is generating only about 1-200$ month income.

There must be reasons for your accountant to suggest the transfer? Could be what you are planning on doing in the future?

NOTE: Residential mortgage lending will allow Investment properties under a corporate name but MUST be a holding co not operating. Commercial mortgage lending will be good with operating company for investment properties.

In your case of a transfer to company, this is not a concern right now since the mortgage is already under personal and your accountant is doing the transfer (buy / sell) on paper into your company.

The renewal will not be an issue either unless you want the mortgage in the company name, then it might be.

Long story short... there is not enough info to provide feedback and I assume your accountant is making a suggestion due to future planning?

[TomcoPDR]

Originally posted by TimLacroix



NOTE: Residential mortgage lending will allow Investment properties under a corporate name but MUST be a holding co not operating. Commercial mortgage lending will be good with operating company for investment properties.



What's the reason that lenders won't lend to opco to have residential properties?

[CapnCrunch]

Originally posted by TimLacroix


there is not enough info to provide feedback and I assume your accountant is making a suggestion due to future planning?

One good reason is you can avoid any inheritance taxes if you die and want to give it to your family/wife/kids. You can just add them as shareholders to your holding company.

[TimLacroix]

Originally posted by TomcoPDR


What's the reason that lenders won't lend to opco to have residential properties?

With an operating company, the concern that residential lenders have is the liability related to any other dealings/activity an operating company might have.

The just in case the other activity in the company is sued etc... the properties can be fair game!

The holding company has to have absolutely no other activity running through it – sole purpose for holding the rental or rentals.

[timdog]

Originally posted by Sugarphreak


You are right, you can’t write off anything if it isn’t setup through a business.

this isnt exactly correct. I write off mortgage interest, improvement costs, etc and my rental property is not incorporated or even setup as a registered business. Its classified as a 'sole proprietorship', using the T776 form when I do my taxes. I have had a trusted accountant review this for me as well.

[TimLacroix]

Originally posted by timdog


this isnt exactly correct. I write off mortgage interest, improvement costs, etc and my rental property is not incorporated or even setup as a registered business. Its classified as a 'sole proprietorship', using the T776 form when I do my taxes. I have had a trusted accountant review this for me as well.

Correct.. you do not need to be a corporation to take advantage of tax rules (deductions) on rentals...