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How your investment portfolio is structured will affect your cash flow and taxation amounts. Once you’ve considered buying more than one rental property, you may want to think about how to organize your investment ownership. Here is a quick guide for beginners on how to structure your real estate portfolio. How to Structure a Real Estate Portfolio
Holding real estate personally can lower your taxes if you stay within a low bracket, but as you start acquiring more income from your rental units, you may need to consider alternative holding strategies.
Another way to own real estate is by holding it in a Canadian corporation. This allows you to access corporate funds on a tax deferred basis, and will potentially allow you to benefit from low tax rates. Owning properties as a corporation may also limit personal liability. Nonresidents investing in Canadian real estate might purchase property via a corporation, to ensure that the income is not subject to foreign taxes and withholding requirements. Corporations can also claim capital cost allowance, unlike individuals.
Limited partnerships that are 100% Canadian-owned will allow investors to access many tax benefits, such as tax shelters involving the purchase of interest. Partners can share the profits or losses of the business and include a percentage in their own income or loss. The ability to due so is limited by “at-risk” rules, and the write-offs you can claim are limited. If you find yourself with a negative adjusted cost base of your interest in a limited partnership, you’ll have to report that negative amount as your capital gain.
Joint ventures are used when multiple partners own the real estate together. Each participant would be able to record their shares as income or less on their books, and benefit from tax depreciation on their respective interest. However, when participating in a joint venture, you need to ensure that the venture adheres to the taxation rules imposed in your particular province, to avoid tax audits.
When holding real estate in a trust, you’ll benefit from the ability to allocate income and capital gain amongst multiple beneficiaries. If the various beneficiaries are in low marginal tax brackets, the total tax implications will be very low. On the other hand, losses experienced through a trust will remain trapped in the trust, and cannot be accessed by any of the beneficiaries.