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
Real estate accountant, real estate investor, speaker, author