When Should You Incorporate Your Real Estate Business?
If you’ve found yourself getting real estate wealthy, you might be hearing the word ‘incorporate’ on your grapevine. Never thought of yourself as a suit wearing, briefcase bearing, business tycoon? That’s a-okay. Incorporating your real estate is more about protecting your personal assets and what your future real estate vision looks like. It’s time to get the lowdown on what you should consider before you incorporate.
Wondering what it actually means to incorporate anything?
Here’s the black and white: Incorporation is a type of business ownership where a separate entity (company) is created. They can be public or private and come with advantages and disadvantages. In terms of real estate, you’re basically creating a company to hold all of your properties, and this company is separat
e from you as an individual.
The key things to take into consideration before you incorporate:
This type of loan does not necessarily involve a second loan, but the costs associated can be very high in some cases. With this loan, you get cold, hard cash in exchange for taking on a larger mortgage. You’ll need to qualify for the new mortgage amount and most likely be viewed as a risky borrower to lenders.
•Do you want to protect your personal assets?
When you incorporate, you split your assets. A beautiful result of this is that your personal assets get separated and protected. If the rental properties you own were to be the target of litigation, owning them through a corporation would mean that plaintiffs could only take assets owned by the corporation. This protection is definitely the biggest advantage of incorporating.
•How do you feel about anonymity?
Incorporating allows you to keep your personal life and your landlord life separate — so you can put away the sunglasses and fake beard! Owning rental properties through a corporation means that your tenants write to your business name and address. You can open your curtains wide and call off that not-so-terrifying guard dog!
•Wondering about the tax implications?
The scales can tip either way when we look at incorporating and tax. On one half, by incorporating your rental properties, you gain separate tax brackets for personal income and corporation income. Having a corporation can also equal eligibility for certain tax deductions. On the other half, incorporating could make you pay more tax than before. This depends on how much passive income and profit your corporation makes and if your province has land transfer tax. If you want to know which way your personal scales will tip, talk to a tax specialist.
•How much is it going to cost you?
Setting up your incorporation comes with one-off fees, which can vary, and legal fees if you get a lawyer to support your setup. It isn’t recommended to set up on your own, though — unless you really do have the corporation know-how! Once you’ve set up, there are annual fees such as a corporate tax return, which can be anywhere between $750-$3000 depending on your accountant and required services.
•What does your future hold?
If you see yourself with only one or two properties, it might not make sense to incorporate. But if there’s a future headed your way rich in real estate, then incorporation might make sense because of the limited liability and the admin costs you’ll be able to spread out. Thinking about your retirement fund? Incorporation gives you more flexibility when your income is taken as dividends.
Let’s wrap things up!
Feeling crystal clear about incorporating? Awesome! Remember, it’s not a one-size-fits-all kinda’ thing. Incorporating won’t be for everyone. If you’ve assets you want to protect through limited litigation, you want to stay as anonymous as Banksy, or you’re clear on your taxes, then incorporating could be ideal. If the start-up fees scare you, you don’t see a real estate empire in your future, and you actually like your tenants coming round to crack a cold one, then you might steer away from incorporating. Whatever you lean toward, definitely consider talking to relevant experts.