So you’ve heard you can use a corporation for property acquisition. Yes, instead of buying real estate in your personal name, you can establish a corporation as the official owner and title holder of a property.
But should you? The definitive answer hinges on the specifics of the situation you’re in. This post will help give you context on what factors should affect your decision to buy real estate as a corporation. The following key principles merit your attention.
Benefit #1: The Tax Benefits Of Having Shareholders
Whether you possess property as an individual or via a real estate corporation, you’ll face basically the same tax scenario. You’ll receive a tax exemption on half of the capital gains. To be clear, rental earnings and taxable capital gains garnered through a real estate corporation are subject to a taxation rate of 50.2%.
Notably, approximately 30.7% of this tax payment is fully refundable to the corporation when the profits are disbursed as dividends to shareholders.
If that arrangement is feasible and beneficial for you, then buying real estate through a corporation becomes more enticing.
Essentially, the tax system is structured to encourage the withdrawal of profits as dividend income on personal tax returns (of your shareholders) — the same way an individual who personally owned real estate would withdraw the profits and get taxed on their personal tax return.
Benefit #2: Protecting Yourself From Liabilities
Certain categories of property, such as commercially rented properties, typically carry a greater liability risk compared to residential rental properties, which are lower risk. Opting to secure the property within a real estate corporation offers a safeguard for your personal assets, including your residence and vehicles.
This is because corporations have limited liability, meaning your personal assets remain protected from the financial debts and legal responsibilities of the business.
The initial incorporation process is a one-time expense and can readily prove its worth in the event of a lawsuit. If your property carries inherent financial risks, this is unquestionably a factor worth contemplating.
Benefit #3: Adaptable Succession Planning With Minimal Estate Taxes
This stands as one of the most significant advantages of acquiring real estate through a corporate entity, especially if you intend to expand your investment portfolio substantially.
If you wish to mitigate estate taxes while also transferring real estate to your family, corporate frameworks provide the greatest degree of adaptability. Hence, corporations are a succession planning tool used by many.
There are also pitfalls to be aware of when it comes to succession planning involving a corporation.
Pitfall #1: Lifetime Capital Gains Exemption? Forget About It
Some real estate investors mistakenly assume they can leverage the lifetime capital gains exemption of $800,000 by extending its application to shares sold by the real estate property’s corporation. However, this is a misconception.
The lifetime capital gains exemption solely applies to the sale of shares from an active business corporation and does not extend to shares from a corporation primarily engaged in passive income activities, such as a real estate corporation.
Are there alternatives, then? Yes. Leveraging a real estate corporation often serves as an effective strategy for executing an estate freeze, which minimizes taxes upon your passing. In addition to tax advantages, an estate freeze will mitigate personal liability, which is particularly useful with high-risk properties.
To become familiar with the other pitfalls of corporate real estate, check out this guide to the top five corporate real estate pitfalls and how to avoid them.
Final Thoughts: Buying Real Estate With A Corporation
Real estate plays a vital role in a business’s overall strategy, impacting its operations, finances, brand, and long-term growth potential. Well done for reading up on this critical decision that affects the success and sustainability of your business.
Contact us for a free consultation call with one of our tax-specialized accountants. They’ll listen to your goals and situation, then offer tailored guidance toward the savviest course of action.
