Using a corporation to buy real estate: pros and cons

Using a corporation to buy real estate is one of the ways to partner with other investors to invest. A lot of articles have discussed pros and cons.

Pros are:

• The corporation can provides liability protection in case the corporation is being sued by tenants;
• The corporation also protects shareholders from creditors;
• If for just a residential property investment, it may not be good idea to hold it under the corporation; but for a number of properties investment, considering holding them in a corporation to reduce the risk associated with the property;

Cons are:

• Assuming the real estate in the corporation is the passive investment, as a result, the investment income is subject to the high corporate tax rate;
• Similarly, when the assets (the property) is disposed,  hopefully, significant profit has been generated and as a result, the corporation needs to pay taxes on the capital gain portion; before the money finally arrives in shareholders’ bank accounts, shareholders need to be ready for taxes on the dividend distributed from the corporation. This is called “double taxation”.
• In order to be eligible for small business deduction (low corporate tax rate), the investment corporation needs to employ more than 5 full time employees  This may be easy to achieve if purchasing an income generating property like plaza, which generally requires property management staff to maintain the operation. On the contrary, it will be challenging for a corporation to hold a few condos/detached houses whiling hiring 5 full time employees (is it reasonable!you need to ask yourself.)

A lot of investors are educated in not to hold real estate in a corporation as the rates are higher. This may be true in certain ways. Holding real estate in a corporation is not a bad idea depending on the situation as none of the investor’s situation is the same. In some cases, partnerships may be a better option as it allows splitting the gain/income with partners, who will ultimately be personally liable for taxes on his /her share of the partnership’s income. And think further, partnerships generally do not provide liability protection. What it means the partners are also liable for money owed by the partnership or if any of the partners is negligent or causes damage in the course of carrying on the partnership’s business. So, before making a decision, it is suggested considering pros and cons in the investment structure. There is no one-size-fits-all approach available.

One last thing to remind yourself is the cost to maintain the books/records for various structure including bookkeeping, legal as well as accounting.