Buying Investment Real Estate in a Corporation vs Personal Name: Pros and Cons

Buying Investment Real Estate in a Corporation

Pros of buying in a corporation:

1. Liability Protection: The corporation separates personal and business liabilities, limiting personal risk.

2. Tax Advantages:

   • Transfer of retained earnings between related corporations without triggering personal income tax.

   • Corporate tax rates on rental income are often lower than personal income tax rates.

   • Easier to deduct business-related expenses, such as management fees.

3. Scalability: Facilitates partnerships or joint ventures with others. It is also easier to sell shares of the corporation instead of the property itself.

4. Estate Planning: Shares of a corporation can be transferred to heirs with possible tax deferrals.

5. Professional Image: Establishing a corporation signals professionalism and business intent, which may attract certain investors or partners.

Cons of buying in a corporation:

1. Setup and Maintenance Costs: Incorporation involves one-time legal fees, registration costs, and annual accounting expenses.

2. Higher Financing Rates: Banks might charge higher interest rates and demand personal guarantees for loans taken by corporations. It might also be harder to get a mortgage as a corporation.

3. Complex Tax Filing: Requires separate tax returns and potentially higher accounting fees.

4. Loss of Personal Tax Benefits: Corporate-owned properties do not benefit from personal capital gains exemptions on the sale of primary residences.

5. Administrative Burden: More paperwork, compliance requirements, and regulations to follow.

Buying Investment Real Estate in a Personal Name

Pros of buying in a personal name:

1. Simpler Process: Lower upfront costs and straightforward tax filings.

2. Access to Better Financing: Typically lower interest rates and more favorable loan terms.

3. Capital Gains Exemptions: Primary residences qualify for tax-free capital gains when sold (not applicable for rental properties).

4. Flexibility: Easier to refinance or restructure loans without the need for corporate resolutions.

5. Lower Annual Costs: No need for separate corporate filings or legal maintenance fees.

Cons of buying in a personal name:

1. Higher Tax Rates on Income: Rental income is taxed at personal rates, which can be high if you’re in a higher tax bracket.

2. Personal Liability: You are personally liable for debts or lawsuits related to the property.

3. Harder to Scale: Difficult to bring in investors or share ownership.

4. Estate Challenges: Transferring property to heirs may trigger significant taxes upon death. This can be somewhat mitigated by corresponding life insurance.

My Opinion:

The decision of buying investment real estate as a corporation or in a personal name depends on your long-term goals and financial situation.

If you plan to have a smaller real estate portfolio with, say, less than 3 properties, owning properties in your personal name is simpler and cost-effective.

For serious investors looking to scale their portfolio: A corporation is advantageous due to liability protection, tax efficiency, and estate planning flexibility. This is a good option for those who are looking to create an inter-generational asset.

Please consult a tax professional and/or your accountant and be clear on your long-term goals.

Current Real Estate Trends in GTA

According to publicly available data from the Toronto Regional Real Estate Board (TRREB), the Greater Toronto Area (GTA) real estate market remains strong despite fluctuations. For instance:

• Rental Demand: With average GTA rents increasing by 8-10% year-over-year, investing in rental properties continues to yield steady cash flow.

• Property Appreciation: GTA home prices have shown a compounded annual growth rate (CAGR) of approximately 6-7% over the past 10 years.

• Investor Interest: Recent trends indicate a rise in corporations purchasing real estate to benefit from tax efficiency and asset protection, particularly among investors holding multi-unit properties.

  
  

These insights suggest that while both ownership structures have merit, serious investors leaning toward scaling their portfolios may find corporations more advantageous over the long term.