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Overview: Should I Incorporate My Rental Property?

Many clients ask us whether they should incorporate their rental property in Canada.

While many choose to rent out their properties without incorporating, it’s essential to explore the valuable advantages and disadvantages of incorporation.

In this article, Toronto business lawyer, Antonio DiMinno, of DiMinno Rizzi Lawyers, explores whether incorporating before purchasing your rental property is the right move.

 

should I incorporate a company to hold property

Advantages of Incorporating Your Rental Property: Liability Protection

The main reason real estate investors incorporate their rental property is asset protection.

Here’s how it works: You incorporate first, and then, instead of personally owning the property, the corporation buys the property.

Failing to incorporate carries the risk of personal liability in the event of unfortunate incidents on your property or involving your tenants. For example, slip-and-fall accidents on icy surfaces, injuries due to faulty infrastructure like stairs, or property damage stemming from burst pipes could result in significant financial liabilities.

Without the protective shield of a corporation, you may personally face substantial debts, financial insolvency, or even legal consequences, depending on the circumstances.

However, when you opt for incorporation, a clear line is drawn between your business assets and personal holdings. Think of it as a form of financial insurance. By establishing a corporation, you establish security for your savings, personal residence, and other assets, shielding them from potential claims arising from issues related to your rental property.

Advantages of Incorporating Your Rental Property: Tax Benefits

Incorporating your rental property not only shields your assets but also offers opportunities for financial growth.

Incorporation of your rental property offers various tax benefits. For instance, when you receive rental income personally, it can elevate your income into a higher tax bracket, resulting in increased tax liabilities.

However, by having your business collect rent payments, you can strategically lower your overall tax burden. Additionally, this setup allows you to claim numerous home-related expenses as business expenses, given that your residence now functions as a business property.

Consequently, incorporating your rental property increases your profit, enabling you to maximize your rental income.

Of course, it’s always best to speak to an accountant for your own personal tax situation. It’s also best to speak to a business lawyer that specializes in real estate investors: see this article to learn more. 

Disadvantages of Incorporating Your Rental Property

Missing the Principal Residence Exemption

If the rental property is also partly a principal residence, incorporating your rental property may cause you to lose a significant tax advantage – the principal residence exemption. This exemption can translate into hundreds of thousands of dollars. This benefit becomes especially pronounced when engaging in long-term property flips or retaining properties in a steadily appreciating market.

 

Higher Income Tax for Rental Income

Secondly, depending on your personal tax circumstances, incorporating a company to hold the rental property may lead to higher income tax payments. The tax burden can be more favorable if you had bought the property in your own name, instead of incorporating a company to hold the property. 

 

Administrative Costs

Thirdly, the administrative expenses associated with starting and maintaining a corporation for your rental property can substantially affect your cash flow. This includes initial setup costs that can amount to several thousand dollars, in addition to ongoing expenses for accounting and legal services.

How a Toronto Incorporation Lawyer Can Help

If you are considering incorporating your rental property, a crucial first step is to speak to a business lawyer, or at least a lawyer who does incorporations. It is also critical to speak to a CPA or relevant tax professional.

We’ll work closely with your professionals to clear the fog and ensure that your rental properties are protected. 

Contact us today for a FREE strategy session!

Antonio DiMinno

647-205-9128

antonio@drlawyers.ca

 

 

Disclaimer: All number figures are approximate only and may be subject to change. Like all material on this website, this is not financial, legal, or tax advice. Contact a professional for your specific situation. 

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