When and how should you incorporate a real estate business

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When should I incorporate a real estate business? This is one of the most common questions I get as a real estate accountant. For real estate investors, each situation is unique, however I outline some of the common questions around this topic in this video.

Our video transcript is below.

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Introduction to when and how should you incorporate a real estate business

Let’s talk incorporating businesses for real estate investors. I’m George Dube, saving the world from tax one bow time at a time®.

When should I incorporate a real estate business?

Real estate investors often have in their mind that they must have some threshold or milestone that has to be reached before they incorporate, before it makes sense. I’d like to put a twist on that and suggest it probably will make more sense to consider “where am I going”, not where am I today.

And so, if over the next three-ish, five years, I’m going to be acquiring real estate, and I don’t mean equity but the value of the real estate itself, roughly $1.5 million or greater, I’m much more likely to be wanting to get into that incorporation process.

If I already have an active business for example, so maybe I’m a professional, maybe I’ve got a corner store, I’m selling or servicing widgets of some type, I’m much more likely to want to use another corporation.

And a large part of that comes down to if I know or I’m pretty confident that at some point down the road I’m going to have a corporation, it’s normally much cheaper and easier, less flags for Revenue Canada, less flags and aggravation from a financing perspective, if I incorporate on the first property as compared to after I hit a certain milestone. The cost of transferring properties, while we do it all the time is something that can be avoided if we do it right the first time.

What are one of the primary mistakes that real estate investors fail to think about when deciding whether to incorporate a real estate business?

Give a lot of thought and here’s where I think a lot of people go sideways, to what happens down the road. In other words, if we’re just measuring on day one, maybe the corporation is worse.

But now let’s consider, well, down the road I might be in a retirement mode or retirement in a semi-fashion or my spouse, they may do the same. Maybe both of us will always be in a high tax bracket and instead we’re looking to the next generation or the generation thereafter.

Should I set up a three-tier structure?

Again a common question that we receive. For more details, see Three-tier structure: Should real estate investors still have one?

Can incorporation for real estate investors be a DIY project?

As real estate investors, perhaps we are a little bit preconceived to the concept that do-it-yourself projects are great. They help save money and we’re learning as a part of the process.

Knowledgeable real estate investors also know many do-it-yourself projects are great ways of costing us a lot of time and money that we didn’t have or would rather allocate elsewhere.

It is extremely rare, not impossible, but extremely rare when I come into a situation where someone has previously set up their own corporation, they’ve bypassed the lawyers and tax advice, they’ve saved a few bucks”. But by the time the legal team and my tax team have fixed things, I can assure you it was much more expensive as compared to had we the opportunity to do things right the first time.

Who should you talk to when considering the incorporation process?

Most professionals will be in agreement, it’s probably easiest to start with the tax advisor. Seeing what makes sense from that perspective in your particular situation.

Normally, then we’re talking to the legal advisors.

I also like to talk to the finance professionals. How is this going to impact current or future acquisitions or refinancings from their side depending on how we’ve put things together? If I’ve already got some properties, this will even be more critical. But it’s not a, “I can talk to one person and kinda find the magic solution”.

It’s a team environment and I think it also helps talking with other investors that have been there successfully. This can be a bit more challenging as at times I appreciate there are quite a number of investors that have a lot of experience. But quite frankly, they have a lot of experience at doing it incorrectly. So scout around, don’t rely, I would suggest, on just one source. Check out the team.

Thanks for watching and considering all the different aspects of whether or not to incorporate a real estate investment business. And again, it’s summary in nature, there’s a lot more to it that will also be dependent on your particular situation.

Have more questions? Please subscribe, follow and even share. I want all of us to have the tax information we need to Do Wonderful Things®.

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Resources

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Back to: Buying real estate in a corporation: Ultimate guide for Canadian real estate investors