Moving real estate to corporate ownership: 7 tips you need to know

Posted on: July 27th, 2016 by Real Estate Accountants 16 Comments

Real estate investors discuss with real estate accountants whether properties should be moved to a corporation

The number one question for real estate accountants after “should I incorporate” is “can I move my properties to my company from my personal name?” Moving your personally owned rentals is not a “moving job” that should be undertaken without a great deal of thinking ahead and planning. You must ensure your real estate accountant, lawyer, and financing team are all on the same page. Here are 7 tips you need to know:

1) Before doing anything

Before transferring any property, consider whether the real estate should actually be in a corporation. A host of reasons exist for holding properties corporately including tax, legal, financing, business, estate, succession or legacy planning.

That said, you can also use some of those same reasons, such as tax and financing, to argue buying or keeping properties in your personal name. Generally speaking we find that from a pure tax perspective, owning one or two small properties personally is perfectly fine.

2) Before you close…if you have that advantage

If you’re in the fortunate situation of having yet to close on a property, despite having already made your offer, you do have some more flexibility with the ownership. In this case, it may be relatively easy to create a corporation, amend the purchase and sale agreement with respect to the purchaser, and cleanly close the property. Provided that your team has sufficient time, and you are confident that the vendor will accept the change in purchaser, we see many deals change in this way. (An exception can be if the vendor has another potential purchaser who has given a superior offer and uses this as an opportunity to take advantage of it.)

3) Trust agreements

If you find it challenging to change the purchase and sale agreements to a corporation and still get the deal to close, it may also be possible to use a trust agreement. The trust agreement means the property may be legally acquired personally by the purchaser but the individual may do so in trust for their corporation. (This is subject to legal and financing concerns in particular.) The trust agreement would spell out that the corporation is the beneficial owner of the property and thus the corporation is effectively treated from a tax perspective as the owner and is entitled to the rental income and on the hook for its expenses.

4) Costs upon transfer

What is this going to cost? The first three to consider are:

  • Transferring a property to a corporation results in a disposition. From a tax perspective, this means that if the property has appreciated in value since it was acquired, you will be taxed on the capital gains.
  • As well, “recapture” may result. If capital cost allowance (CCA), which is often thought of as depreciation, is claimed on an appreciating property, the CCA is included into income at the time of sale.
  • Further, depending on the province, the transfer triggers the land transfer tax.

In many cases, the above costs can be quite expensive and practically speaking prohibit a transfer.

Financing issues may arise if the financial institution has concerns. We generally find that certain institutions are typically neutral or positive, but some are negative or simply wish to keep things as they are until the next renewal. Trust agreements often alleviate concerns but working with your financial advisors are key.

Lastly, you need to budget for some accounting and legal fees to go through the process.

5) Deferring costs

Fortunately, in many cases, with the assistance of your legal advisor, we can complete a “rollover” which allows you to transfer qualified property to a company on a tax deferred basis. Essentially, when you follow the right steps, the Canada Revenue Agency will recognize that you simply indirectly own the real estate and thus your net worth has remained the same so there is no practical economic change. The rollover treats the company as if it effectively was the original purchaser of the property. Thus the incomes taxes which would otherwise be triggered are held off. This makes such planning much more manageable.

And, clearly if the property has failed to appreciate in value (we do see this at times when there is a downturn in the market) the rollover process may be unnecessary.

6) But maybe you should pay all the tax up front…

As odd as this may seem, at times you may want to transfer the property to the company and actually pay all the taxes related to this transfer! If the property will trigger a capital gain, essentially half the taxes are otherwise payable. What’s the advantage?

In selling the property to the company, the company must pay you for the property. Consider a property acquired initially for $100,000 that has accrued in value to $300,000. In transferring the property a capital gain of $200,000 would result and thus 50% would be taxable or $100,000. Assuming some rough numbers and a top tax bracket of roughly 50%, personal taxes of $50,000 would result. Now, the company would owe you $300,000. Thought of in another way, you would pay $50,000 on income of $300,000 which I suggest would be a very reasonable tax bracket for many investors. Perhaps you don’t have the ability to take this all at once, but it can wait! We can take it back over time. This strategy is even more effective where business owners draw their normal income from the company.

7) Keeping it personal

In some cases, you may decide to simply acquire future properties in a corporation and leave the existing personally owned properties as they are. We see this more frequently where owners are unconcerned of legal issues related to personal ownership. Alternatively, given the cost of transferring properties, the transfers of a handful of properties may be effectively scheduled over a few years or timed with the next refinancing/renewal of the property.

Transferring properties to the company can be a bit of a task, and create some additional costs that ideally could have been avoided initially. That said, our clients have many completely valid reasons for acquiring the property personally and then later transferring the real estate to a corporation. But, as you can see, this is not a DIY decision or project. Discuss with your team to come up with a plan that makes sense for you – not only today but in the future.

George E. Dube, CPA, CA

George E. Dube, CPA, CA
Real estate accountant, real estate investor, speaker, author

Tags: , , ,

16 Responses

  1. Grace DeLavoye says:

    I already have a property Corp and a management Corp. I want to sell my only property in the Corp and am considering buying another property in my own name.
    Will this have any negative impact on the taxation of the management Corp. I am currently using the management Corp to pay my home office and general business expenses (and some property expenses) plus I use it to run a small sales business and invest in 2nd mortgages.

    • Real Estate Accountants says:

      First and foremost, please speak specifically with your advisor as they will know more of your complete situation. Our answer is based on very limited information and thus should not be relied upon, but merely providing some thoughts for consideration that may be applicable.

      While I’m not at all confident a future property should be acquired personally as compared to the company designated for this, given your other activities conducted through the management company, there is not likely a large negative implication. If it makes sense, property management fees can be charged to yourself personally to better justify the expenses related to the properties claimed through the property management company. Assuming the expenses are reasonable and relate to the property, this may make sense.

      I believe you need to talk with your advisor regarding the overall plan between personal and corporate activity, the flow of funds, who does what, etc. to ensure it all makes sense from a business perspective and is tax efficient.

      George Dube

  2. Ed Hazell says:

    Great article, thanks

  3. Martin says:

    Very informative.
    How about moving principal residence to corporate? Then rent from the corporate. Get appreciation without payment personal tax.

    • Real Estate Accountants says:

      While theoretically possible to move a principal residence to a corporation, it is rarely done. I think I have been involved with two such transactions over the last 20+ years. For the most part, people won’t complete the transfer as they value the principal residence exemption, which is unavailable to the corporation, more than other potential tax benefits. Further, there’s the question of what value did the shareholder receive for having a corporate owned asset made available to them. This is relatively subjective hence opening up an opportunity for further discussions with Revenue Canada, which most people would rather forgoe. It sounds like a great idea to start, but once you get into technicalities unfortunately not a prudent plan absent special considerations.

      Warm regards…

  4. Henry Verdoux says:

    Hi George,

    I just wondering how a foreigner non-resident in Canada could create a company and buy real estate in Canada?

    • Real Estate Accountants says:

      We have a number of non-resident clients who invest in Canadian real estate and they hold the property in different ways depending on their situation. As well there are many factors to consider, such as legal and financing, and country of residence. We have certainly had non-resident clients invest through Canadian corporations though. I would recommend speaking to an advisor to help determine what would be best for your non-resident situation.

  5. Kira says:

    Hello Ed,
    Husband daughter and I own two rental houses. Is it possible to create a corporation instead having them in our names? Can we create a corporation for existing owned real estate please.
    Thank you.

    • Real Estate Accountants says:

      Generally speaking, yes, this is doable. There are several exceptions – you want to make sure the property qualifies and other conditions are met. Whether it should or shouldn’t be done is a separate matter. There are pros and cons, particularly given the proposed tax changes announced on July 18 by the Federal Government.
      Clearly there are many non-tax reasons to make the transfer as well.

      Warm regards…

  6. Joon Pack says:

    Hi George,

    Great article! Wondering are there any regulations against selling personal property to your own corp? Say, I hold a personal property that has appreciated from $100,000 to $300,000 and by selling to my own corp no capital gain would incur (exempted) but my corp would have to pay land transfer tax. And since I won’t need to pay tax on that gain on the personal level, the corp can owe me that money for some time.. is that correct?

    • Real Estate Accountants says:

      Good afternoon Joon,
      Good question. This will be a longer answer, so I’m putting together a blog post for this question. I’ll link it back here when complete.

      Warm regards…

  7. Matt says:

    Hi George,
    My wife and I own three properties (none creating income) and we are about to venture into buying rental properties. We would like to sell a piece of land to help fund our rental property investment but do not want to trigger capital gains. Is it possible to incorporate, transfer the land to the corp, sell it and then buy a rental property immediately and not trigger gains? The company still has the same net value but has changed assets.

    • Matt says:

      A follow up question. At what net income level do the tax benefits outweigh the management costs of a corporation? Tough one to answer precisely but an estimate?

      • Real Estate Accountants says:

        Good afternoon Matt,

        A general answer is easy. It’s the precise answer that is the challenge. There’s far more to consider in incorporating that just the net income. Beyond legal, financing, etc issues, consideration of the vendor’s income, current income, future expected income, family situation, family incomes and involvement, future investment and business plans, estate considerations, succession planning, etc. all play a role. The tax changes proposed on July 18 by the Federal Government will also have impact on the decision.

        I know many people like rules of thumb for incorporating, but those rules are generally misleading and dangerous.

        Warm regards…

    • Real Estate Accountants says:

      Good afternoon Matt,

      For the most part, you’re not allowed to exchange assets without incurring a tax bill for the same. As I understand your description of the proposed transaction, taxes would be incurred.

      Warm regards…

Leave a Reply