Hello fellow real estate investors,
Happy Chinese New Year everyone! It is the year of Goat in 2015. Our family wishes everyone a happy and healthy and prosperous year of Goat.
Believe it or not, according to this Astrologer from Fortune.com, the real estate market and real estate investments are going to be stable and perform consistently. That means it’s a good time for any prospective real estate business to get on the ladder and start marketing themselves.
Yay to all real estate investors!
As I mentioned previously in my blog, real estate corporations can be used to save you thousands of dollars of taxes when setup properly.
If you’re thinking, “A corporation is a corporation is a corporation, how can it be setup incorrectly?”
Standard corporation setup without the contribution from a professional accountant usually has standard one class of shares, owned 50/50 by a real estate investor and the spouse.
However, one of the strategies to use corporation to save you thousands of dollars is to split some of the income with a lower income spouse and/or your adult children.
If the corporation is setup properly, it should be allowed to offer multiple classes of shares. Each class of shares is owned individually by you, your spouse and/or your children.
When $50K dividend is declared, Mr. Investor and Mrs. Investor would each be required to report 50% of the $50K, i.e. $25K dividend income each, on their respective personal tax return.
Mr. Investor might have just decided to take a year off from work, but Mrs. Investor is still making 6 figure salary. Mr. Investor is likely able to receive this dividend without any tax liability, assuming he has no other income. But with this additional $25K dividend income, Mrs. Investor would still need to pay a significant amount of tax, roughly $10K.
On the other hand, if the corporation is setup properly, Mr. Investor owns class A shares, Mrs. Investor owns class B shares, and Junior Investor owns class C shares.
With this structure, the real estate corporation can declare the $50K dividend to Class A shareholder, Mr. Investor, who is on a year no pay leave, will report the entire $50K of income. He is then responsible for roughly $2,900 of tax liability. Mrs. Investor, who is the Class B shareholder, is not entitled to any dividend, and hence no dividend income is reported on her tax return.
With the proper shareholding structure, it can save you $7,100 tax liability.
And this is the power of owning properties in your corporation!
Of course, beyond the income tax splitting strategy, there are also other considerations an investor should take into account when structuring the corporation shareholding.
One of the most important factors is control of the company. Are you willing to give some control to your kids? If not, what can you do? You will definitely have to consult your professional advisor.
Until next time, stay warm and have a great year of Goat!
Cherry Chan, Your real estate accountant
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.