Buying a property is a big decision as it involves a significant initial investment and regular maintenance and repair charges. Whether to buy a property through a corporation or your name involves business and tax aspects. The primary determining factor is why you want to buy a property. Is it for residence, business, leasing, or investment? The purpose of the property changes its tax treatment.
When Is It Not Beneficial To Buy a Property In the Company’s Name?
If you want a home for residence, it is always better to buy it in your name to avail the principal residence exemption. The exemption allows you to sell your property without incurring capital gains tax. Only an individual can claim this exemption. If you buy a home or a vacation property under the company’s name, you must pay the fair market rent each year or add that rent to your taxable income. But buying properties other than homes under the company’s name could be beneficial.
When Is It Beneficial To Buy a Property In the Company’s Name?
Buying any asset in a company’s name benefits business or investment. For example, a corporate-owned property is a property where the company is the legal owner and responsible for designing, constructing, renovating, and managing the property. On the other hand, a company could own a higher-risk commercial property like an office, retail store, manufacturing site, or residential property or land.
Many small business owners prefer to hold properties under the name of their operating company or create a separate corporation for ease in legal, taxation, financing, and estate planning. In this article, we will look at the various scenarios where it is beneficial to establish a company to buy and hold a property.
Small Business Owners Buying Property for Business Purposes
If you have accumulated savings in your business, you might consider buying a business property. When you buy property from the corporate retained earnings, you need not withdraw the money as salary or dividends, thereby saving on personal income tax. In addition, the property has an intrinsic value that can bring capital gains in the future. Moreover, you can use the property for business and deduct maintenance costs as a business expense.
Corporations enjoy lower tax rates. Hence, the property sale’s rental income or capital gain can be taxed as business income. But owning a property under the company’s name exposes it to business risk. For example, if the business runs into troubles or lawsuits, creditors have a claim on all assets owned by the company.
Establishing a Separate Corporation To Limit Liability on Risky Property
Small business owners can create a separate company and transfer corporate retained earnings tax-free into the other corporation to buy property. It will protect the property against business risk. And if the property is under litigation, it will protect your business and personal assets from litigation risks. Your liability is limited to your investment in the corporation holding the property. If the property encounters a lawsuit, your one-time cost of incorporation is justified. However, you have to bear the annual legal and accounting fees.
You could also purchase liability insurance to reduce your liability on a risky property instead of taking the expensive route of establishing a separate corporation.
Buying and Selling Several Properties for Profits or Rental Income
If you are looking to buy a portfolio of properties and profit from selling them at a gain or renting them out, it is a better option to purchase these properties under the name of a company. This is because you can spread the administrative cost and use capital loss on one property to offset the gain on another. And owning multiple properties through the company limits your responsibility.
Co-Owning a Property With Someone Else?
If you are co-owning the property with your spouse or a third party, holding it under a separate legal entity is better. For example, a corporation can set the ownership percentage and down payment and clearly define the responsibility of property management, repairs, maintenance, taxation, and legal and accounting fees. A detailed arrangement also reduces the chances of disputes and eases the process of dissolving or transferring the co-ownership.
Freezing Estate For Succession Planning
If you are buying properties to build a sizeable estate and pass it on to future generations, buying properties under a corporation has legal and tax benefits. A corporation allows you to pass the estate to your family with a minimal estate tax. In addition, the corporation can keep paying income from the property to the legal heir. It can also help you freeze your assets to limit tax liability.
Canadian residents can also buy a U.S. property using a corporation and avail of U.S. estate tax exemption.
Every corporate structure has advantages and disadvantages for holding property under different situations. Talk to a professional tax consultant before buying or selling a property. The consultant can guide you on the structure best suited for your situation and bring you significant tax savings.
Contact McCay Duff LLP in Ottawa for Tax Consultation
At McCay Duff LLP, our expert accounting and tax consultants can help you design and implement a corporate structure and support the tax filing of your corporation. In addition, we can provide you with recommendations on preserving your property value amid changing tax laws. To learn more about how McCay Duff LLP can assist you with property planning, contact us online or by telephone at 613-236-2367 or toll-free at 1-800-267-6551.