Incorporating a Rental Property: Is it Right For You?
If you’re a landlord or thinking of becoming a landlord with one or more rental properties, you may be wondering if incorporating your business is the right move. While there are many benefits to incorporating, there are also some potential downsides to consider. In this post, we’ll take a closer look at what it means to incorporate a rental property, and explore some of the pros and cons of this approach.
What Does it Mean to Incorporate a Rental Property?
Incorporating a rental property means creating a legal entity (a corporation) that owns and operates the property. This can have several advantages, including limited liability protection and potential tax benefits. When you incorporate your rental property, you’ll create a separate legal entity that is responsible for the property’s finances, taxes, and legal obligations. This can help protect your personal assets in the event of a lawsuit or other legal action.
What Important items should a landlord consider before incorporation?
When incorporating a rental property, it’s important to consider the legal implications of the decision. Here are some important legal considerations to keep in mind:
- Eviction Notice: If you plan to incorporate your rental property, you’ll need to provide your tenants with an eviction notice. This is required by law and gives your tenants a set amount of time to vacate the property.
- Capital Gains Tax: When transferring rental property to a corporation, you’ll need to consider the capital gains tax implications. You may be subject to capital gains tax on the fair market value of the property at the time of transfer.
- Holding Companies: Some landlords choose to incorporate their rental properties under a holding company. This can provide additional liability protection and tax benefits, but it’s important to seek legal and tax advice before making this decision.
- Personal Finance: When incorporating a rental property, it’s important to consider the personal finance implications. For example, you’ll need to pay taxes on any rental income you receive, and you may also be subject to personal taxes on any dividends you receive from the corporation.
Misconceptions of Incorporating a Rental Property?
One common misconception about incorporating a rental property is that it will result in double taxation. This is not necessarily the case. While corporations do pay corporate income tax on their profits, they can also deduct certain expenses such as property management fees, repairs, and maintenance. Additionally, any income that is paid out to you as a shareholder is taxed at your personal tax rate.
The Pros of Incorporating a Rental Property
- Limited Liability Protection
One of the main advantages of incorporating a rental property is that it provides limited liability protection. When you operate your rental property as a sole proprietorship or partnership, you are personally liable for any debts, obligations, or legal issues that arise. This means that your personal assets, such as your home, car, and bank accounts, could be at risk in the event of a lawsuit or other legal action. Incorporating your rental property creates a separate legal entity that is responsible for its own debts and obligations. This means that your personal assets are generally protected in the event of a lawsuit or other legal action against the corporation.
- Potential Tax Benefits
In addition, incorporating can also provide more flexibility in terms of tax planning. For example, you can pay yourself a salary or dividends from the corporation, which may be taxed at a lower rate than rental income.
- Professional Image
Incorporating your rental property can also help to establish a more professional image for your business. This can be particularly important if you own multiple properties or are looking to attract high-quality tenants.
- Passive Income
Passive income is a significant advantage of owning a rental property, particularly when the property is incorporated. By choosing to incorporate, property owners can take advantage of the various tax benefits and deductions available to businesses. For example, income earned through a rental business can be treated as passive income, subject to lower tax rates than earned income. This can help reduce tax liabilities, resulting in increased profitability for the rental business.
- Principal Residence Rental Property
For property owners who use their rental property as their principal residence, incorporating the rental property can provide even more benefits. By transferring the rental property to a business entity, property owners can retain their principal residence exemption, which exempts capital gains from being subject to tax. This exemption is particularly advantageous when the property has appreciated in value significantly.
What is the governing act for Landlord and Tenant in Ontario?
The Residential Tenancies Act, 2006 (RTA) is the Ontario law that governs most residential rental units. The RTA sets out the rights and responsibilities of landlords and tenants, as well as the process for resolving disputes. It applies to most rental units in Ontario, including apartments, rented houses, condos, and secondary suites.
What is the Ontario Landlord and Tenant Board and how does it work?
The Ontario Landlord and Tenant Board (LTB) is an independent agency of the Ontario government that provides information about the Residential Tenancies Act (RTA) and resolves disputes between landlords and tenants. The LTB is responsible for enforcing the RTA and ensuring that both landlords and tenants understand their rights and responsibilities.
When a dispute arises between a landlord and tenant, either party can file an application with the LTB. The LTB will then schedule a hearing where both parties can present their evidence and arguments. The LTB will then make a decision based on the evidence presented and issue an order that outlines the outcome of the dispute.
The LTB has the power to order a range of remedies, including:
- The payment of rent or compensation
- The termination of a tenancy
- The eviction of a tenant
- The repair of rental property
- The reimbursement of expenses
If a landlord or tenant does not comply with an order issued by the LTB, the other party can file the order with the court and have it enforced.
The LTB also provides information and resources to help landlords and tenants understand their rights and responsibilities under the RTA. These resources include:
- Information sheets on a variety of topics, including rent increases, eviction, and maintenance
- Online resources, including forms and guides
- Phone and email support
Overall, the LTB plays an important role in protecting the rights of both landlords and tenants and ensuring that disputes are resolved fairly and efficiently.
What safeguards can you put in place to avoid landlord and tenant issues?
As a landlord, there are several steps you can take to safeguard yourself against issues with tenants. Here are a few suggestions:
- Conduct thorough tenant screening: Before renting out your property, conduct a thorough screening of potential tenants. This can include checking their credit history, employment and income verification, and contacting their previous landlords for references. By doing this, you can reduce the likelihood of renting to a tenant who has a history of damaging property or failing to pay rent on time.
- Use an Ontario written lease agreement: A written lease agreement can help protect both you and the tenant by clearly outlining the terms of the tenancy, including the rent amount, payment due dates, and rules regarding pets, smoking, and property maintenance. Make sure the lease agreement is signed by both you and the tenant. Here is an example of a standard lease agreement available through the Ontario government.
- Conduct regular property inspections: Regular property inspections can help you identify any maintenance issues or damage to the property caused by the tenant. This can allow you to address these issues before they become major problems and ensure that the property is being properly maintained.
- Address issues promptly: If you become aware of any issues with the tenant, such as non-payment of rent or violation of the lease agreement, address them promptly. This can help prevent the issues from escalating and becoming more difficult to resolve.
- Know your rights and obligations as a landlord: Familiarize yourself with the Ontario Landlord and Tenant Act and your rights and obligations as a landlord. This can help you make informed decisions and respond appropriately to any issues that arise.
- Obtain proper insurance coverage: Make sure you have the proper insurance coverage for your rental property. This can include liability insurance and property insurance to protect you against damage caused by the tenant or natural disasters.
By taking these steps, you can help safeguard yourself as a landlord against issues with tenants and ensure that your rental property is well-maintained and profitable.
Incorporating your rental property with Ontario Business Central can provide you with peace of mind and help ensure that your business is operating legally and efficiently. If you’re interested in incorporating your rental property, consider reaching out to Ontario Business Central for assistance.
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Ontario Business Central Inc. is not a law firm and cannot provide a legal opinion or advice. This information is to assist you in understanding the requirements of registration within the chosen jurisdiction. It is always recommended, when you have legal or accounting questions that you speak to a qualified professional.