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
