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What is the Best Way to Own Real Estate?

 
An important part of the process in purchasing real estate is determining how it should be owned.
Different ownership structures will have different tax, legal, and other implications.
The most common real estate ownership structures include:

  • Corporation
  • Partnership
  • Individual/co-ownership
  • Inter vivos trust
Let’s take a look at the key implications of these options:

Corporation

Taxes
  • Income is taxed in the corporation
  • If the income is active, you can take advantage of a significant tax deferral
  • If the income is passive, you may pay a higher tax rate in the corporation than you would if it was earned personally

Losses

  • Trapped inside the corporation, but can be carried back or forward to other years to reduce or eliminate taxes otherwise payable
  • Cannot be applied against the income of individuals

Professional fees

  • Higher legal and accounting fees at start-up and annually
  • Separate tax return must be filed

Flexibility

  • More tax and estate planning options


Partnership

Taxes
  • Income is allocated to the partners based on their ownership percentage
  • Each partner is individually taxed at their personal marginal rates

Losses

  • Losses can be applied against income of individuals

Professional fees

  • Extra legal and accounting fees at start-up

Flexibility

  • Income is allocated to partners based on their ownership interest
  • Discretionary deductions, such as CCA, are claimed at the partnership level and cannot vary amongst partners


Individual/co-ownership

Taxes
  • Income is allocated to the individual/co-owners based on their proportionate share
  • Each individual is taxed at their personal marginal rates

Losses

  • Losses can be applied against income of individuals

Professional fees

  • Legal fees may be required for agreements
  • Personal tax reporting requirements are relatively simple

Flexibility

  • Owners must report their income on their personal returns
  • Discretionary deductions, such as CCA, are claimed at the individual level and can vary amongst owners


Inter vivos trust

Taxes
  • Generally, income is taxed at the highest personal tax rate
  • There may be significant tax consequences at the deemed disposition after 21 years

Losses

  • Trapped inside the corporation, but can be carried back or forward to other years to reduce or eliminate taxes otherwise payable
  • Can be applied to reduce income of beneficiaries

Professional fees

  • Legal and accounting fees required at start-up
  • Annual tax returns will need to be filed

Flexibility

  • Profits can be allocated to beneficiaries, resulting in little to no income in the trust

If you are considering purchasing real estate, make sure you are aware of the ownership options and make the right decision for you.



Caveat: The information in this publication is current as of the time it was written. This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Deuzeman & Associates to discuss these matters in the context of your particular circumstances. Deuzeman & Associates does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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