Real estate investments offer tremendous wealth-building potential, but they also come with unique tax challenges. Whether you own rental properties or commercial buildings, strategic tax planning can help you save money, protect your profits, and secure long-term success.
Incorporating Your Real Estate Portfolio
For investors with multiple properties or large commercial holdings, incorporation can offer various tax advantages, such as limited liability and potential tax deferral on corporate earnings. Corporate tax rates are typically lower than personal tax rates on active income, which means retaining profits in a corporation can lead to substantial savings.
How We Help: We can assess whether incorporation suits your portfolio and guide you through the incorporation process, helping you understand the tax advantages and long-term implications.
Capital Cost Allowance (CCA) for Depreciation
Claiming depreciation, or Capital Cost Allowance (CCA), allows you to reduce taxable rental income by accounting for the wear and tear on buildings and eligible equipment. CCA can offset rental income, reducing your immediate tax liability. However, claiming it lowers your property’s adjusted cost base, which may impact capital gains when selling.
How We Help: Our team can help you assess whether to claim CCA each year based on your income needs and future tax plans, ensuring that you maximize benefits without incurring unexpected tax liabilities upon sale.
Utilizing Section 85 Rollovers for Tax Deferral
A Section 85 rollover allows Canadian investors to transfer real estate into a corporation without triggering immediate capital gains taxes. By rolling over property at a specific elected value, you can defer taxes until the corporation disposes of the property, which can be advantageous if you plan to hold onto the asset long-term.
How We Help: We handle the complex paperwork for Section 85 rollovers, including the required T2057 form, and provide guidance on structuring transfers at the most beneficial elected amount to defer taxes effectively.
Income Splitting with Family Members
Income splitting can help reduce tax liability by distributing income to family members in lower tax brackets. In real estate, this might involve allocating rental income or ownership shares of investment properties to a spouse or adult children. However, it’s important to navigate Canada’s income attribution rules carefully.
How We Help: We can help you structure your investments to maximize tax savings through income splitting, while ensuring compliance with CRA regulations to avoid potential penalties.
Leveraging Loss Carryforward and Carryback Provisions
In years where real estate investments experience losses, these losses can be used to offset income in other years through the loss carryforward and carryback provisions. Loss carryforwards allow you to apply losses to future income, while carrybacks allow you to apply losses to past income for refunds.
How We Help: Our CPAs can analyze your financial records to help you leverage loss carryforwards or carrybacks, ensuring that you optimize your tax savings across multiple tax years.
Refinancing Strategies to Increase Tax-Deductible Interest
Refinancing allows investors to access property equity without selling, and the interest on refinancing loans used for business purposes is generally tax-deductible. This can be especially useful if you reinvest the funds into additional properties or other income-generating investments.
How We Help: We offer guidance on refinancing strategies to ensure that your new loan structure is tax-efficient, helping you build your portfolio with maximized tax deductions.
Setting Up a Holding Company for Multi-Property Investors
A holding company can be useful for investors with multiple properties, providing tax advantages and simplifying estate planning. By setting up a holding company, you may be able to defer taxes on rental income and capital gains until profits are distributed.
How We Help: We can assess whether a holding company structure aligns with your portfolio goals and assist with setting up a holding company, while helping you understand potential tax implications and savings.
Taking Advantage of Capital Gains Exemptions
For investors selling principal residences, the capital gains exemption can significantly reduce taxable gains. Additionally, certain exemptions may apply to farmland and small business corporation shares. Strategic use of these exemptions can lower tax liabilities on qualifying properties.
How We Help: We assist you in identifying and claiming eligible exemptions, ensuring compliance with CRA requirements to maximize your savings on capital gains.
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