Buying as Corporation, with back to back loan

[Darryl Allen]

Hello,

Long time lurker, first time poster.

Short background on me - I've been buying & renting properties for nearly 12 years. I've brought my wife into the mix, and we now have a total of 9 units across 7 properties. My wife is stay-at-home, and I work a decent job as a self-employed IT contractor. I'm in the Hamilton, Ontario Canada area, with majority of my properties in Niagara Region.

Between a large portfolio & being self employed, I'm at the point where lenders are harder to find.

To continuing growing, I'm turning to partnering with others who have some land lording experience, good income & a drive for success. This will help me get financing with the banks & more competitive rates. We'll be doing up agreements to discuss how to handle all the scenarios we can think of around the property, ranging from putting more money into it, picking tenants, to sale/divorce.

This brings me to 2 questions

1) Is it worth incorporating? We plan on buying multiple properties, and even bringing in more investors.

2) We'll each be putting in 10% of our first property purchase to get the 20% down. In terms of pulling money out of the corporation, is there any benefit in lending the money at a higher rate than I'm borrowing it for & amortizing it over a significantly longer period? What's the best way to get my money back out of the initial investment, or is it even worth it?

Thank you

[Peter Myers]

In general, and this is not legal or tax advice, just information - while there are exceptions, you rarely want to buy any sort of depreciable property as a corporation.  This creates problems down the road when someone wants to sell their interest or dies.  Under US Tax law, C corporation are not "pass through" entities - meaning there are 2 layers of tax - one layer at the entity level (the corporate tax) and one layer at the shareholder level (the tax on dividends).  While you could choose an "S" corporation and have pass-through tax, there are a number of problems with this: (1) you are possibly creating character mis-matches of ordinary income and passive losses, depending upon the level of management activity you have; (2) a buyer is not generally likely to want to purchase your fractional interest in stock - they will insist on a discount or worse, an asset sale.  The asset sale will trap the capital gain inside the S corp.  While it could be distributed, it will come out as gain as well; (3) there is no "step up" in basis at the death of the shareholder, except as to the basis in the S corporation stock (which is not depreciable) - thus, the surviving spouse can re-set the basis and re-depreciate the property (or sell it and recognize no gain).

Most investors I know either use trusts (a discussion of trusts is beyond the scope of your question), or LLC's taxed as partnerships when investing in depreciable property. In this instance, you are creating an entity (an LLC) but still obtaining one layer of tax (through the pass-through treatment of gains, losses, income and credit). We literally can spend weeks evaluating what type of entity to deploy for a particular investor's purchase. It is rare that a C corporation pencils out when all of the planning factors are considered.

hth,

Peter S. Myers