For people who are looking to achieve financial freedom and secure their future, it’s highly important to start creating a stream of passive income—and one way to do that is to buy a rental property. If done right, you’ll be able to generate income monthly without having the need to work too much, thus increasing your net worth over the years.
Are you planning to purchase a rental property? There are actually a few different ways to go about it. You can either buy the property as an individual or through a corporation. Of course, there are pros and cons to both methods, so it’s important to weigh your options before making a decision.
Here’s a look at some of the key points to consider:
Is the Rental Property Part of the Principal Residence?
If your rental property is part of your existing home (in whatever form—may it be a triplex, duplex, or a basement modified into an apartment), then it won’t be a wise decision to incorporate the property.
The Canada Revenue Agency (CRA) has an important tax exemption for homeowners who own rental properties. This is the principal residence exemption, which allows you to sell your home without paying any capital gains taxes when it’s eventually sold. That is, if there are no other improvements made outside of basic living space, such as adding a second floor or converting partials into full ownership units within one year prior to publication date; otherwise, they may apply at 10%.
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Do You Plan to Own the Property in Co-Ownership or Partnership?
You have to decide whether or not you want to buy the property with someone like your spouse. If yes, it would be best to incorporate it because it secures the legal entity and beneficial ownership of both the owner and the partner. So by the time the two co-owners decide to separate, they can equally split their ownership percentages by 50/50.
A partnership agreement should be crafted to ensure everyone’s rights and responsibilities are clearly outlined. These documents can help with any issues that may arise. For example, the agreement should cover what percentage of the property each person owns, and who takes responsibility for different aspects like repairs, tax reporting, and accounting.
Do You Prefer Limited Liability to Increase Protection Against Potential Litigation or Lawsuits?
If you believe that there is a risk of litigation/ lawsuits with respect to the property you’re purchasing, then it might make sense to incorporate liability protection. This means that the shareholders of the corporation can only lose up to the amount of their investment, thereby protecting your personal assets.
Also, if you want more control of your business and don’t need the protection that comes with being incorporated, it might be possible to buy liability insurance instead.
What Could be Some of the Obstacles or Restrictions to Selling the Property to a Corporation?
There are a few potential obstacles that could prevent a rental property from being sold to a corporation. One is zoning regulations, which might limit the types of businesses allowed to operate in the area. Another is the terms of the lease, which may prohibit a tenant from selling the property to a third party. Finally, there may be restrictions on how a property can be transferred to another owner if it’s subject to a mortgage.
Incorporating your business is something that you should plan carefully. With this, you will need help from an expert at FShad CPA. We can answer your questions regarding restrictions on transferring properties before going through the whole process.
Are You Buying More Rental Properties in the Future?
It is crucial to think about how your investments may be structured when discussing real estate. If you have any plans to buy more rental properties later, then incorporation will be your best bet. In addition, incorporating is a great way to manage your rental property portfolio if you want the benefits of limited liability and increased profits.
However, if you’re looking to make your properties even more secure, then it’s worth taking the time and effort to form separate corporations for each one. This way, any losses can be offset by gains on other assets to keep things balanced out.
Should You Transfer an Existing Rental Property to a Corporation?
Transferring property to a corporation can be a great way to protect yourself from personal liability in the event of lawsuits or other legal issues related to the property. It can also make it easier to manage rental income and expenses and provide some tax benefits.
To transfer the property to a corporation, you have two options:
- You can transfer property at its fair market price, and if you do so, the difference between your original purchase price and what it is now worth will be treated as capital gains. You’ll need an independent appraisal from someone qualified before reporting this on taxes owed for them once they’re paid off.
- The property can be transferred under section 85 rollover at its original cost. These are complicated transactions that require the assistance of an accountant or tax specialist.
Investing in property is a great way to build wealth, but it’s important to know the tax aspects of your investment and other aspects that need careful thought before you make any decisions.
To ensure that your investment is successful and tax-effective, consider working with an experienced accountant to guide you through all aspects of the process. Your chartered accountant can provide valuable assistance in planning for future growth in this side career!
Do you want to invest in real estate but don’t know where or how to start? We can help with that! The time to strike is when the iron’s hottest, so what are you waiting for?
Contact us today at FShad CPA for advice on investing wisely. We take pride in providing our clients with top-notch tailored services, including corporate tax planning, corporate taxes, accounting, bookkeeping, and advisory services. Call (844) 982-4700 to schedule an appointment with one of our experts!
This publication is produced by FShad CPA Professional Corporation as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.