Over the past few years, the trend of acquiring property under a corporation has been on the rise. Many individuals and businesses are taking this path to purchasing properties, whether for investment or strategic advantages. However, can one purchase a home under a corporation? The short answer is, yes, it is. Yet there is more to the process than simply owning a piece of land, and it comes with its share of rules, regulations, and risks relating to how the land can be used and what it can be used for.
So, what is the benefit to a person or corporation in purchasing a home in a corporation? The reasons are persuasive — liability protection, tax benefits, privacy, and more. But with these benefits also come some challenges that require thoughtful consideration.
Corporate Real Estate Explained
Corporate Real Estate: What Is It?
Simply stated, corporate real estate is any property that a corporation owns instead of an individual. This enables businesses or individuals to conduct business as a legal person under the registration of a corporation (e.g. a Limited Liability Company (LLC), S Corporation (S Corp), or C Corporation (C Corp)) rather than having assets in his/her name.
Typical corporate structures utilized for real estate acquisitions include:
- Limited Liability Company (LLC): The most popular real estate way to invest because of its flexibility and liability protection.
- S Corp (S Corporation): Offers tax benefits, particularly for smaller businesses.
- C Corporation (C Corp): Rarely used because of double taxation but still an option for larger companies
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Reason for Buying a House Under a Corporation
If you’re wondering why anyone would bother with buying a house under a corporation, here are some of the main advantages:
Liability Protection
As long as you keep up with your corporate paperwork filing and other corporate formalities, your personal assets are typically protected from claims that arise with respect to the property. So, for instance, if someone sues after getting into an accident on the property, the corporation — not you personally — will carry the liability.
Privacy for Owners
Purchasing a property under a corporation helps protect your identity from public record. This can be especially beneficial for high-net-worth individuals or public figures who wish to maintain privacy regarding property ownership.
Tax Advantages
Advantages of Corporate Ownership of Property: There are tax deductions available to corporate owners that may not be available for individual owners. Expenses such as maintenance, property management and depreciation can often be deducted.
Drawbacks to Consider
While the perks are enticing, there are some trade-offs:
- Increased Costs: Corporations incur registration fees, annual filings, and legal compliance, which can be expensive.
- Complexity: Corporate-owned property takes more paperwork and legal matters than personal ownership.
Buying a House Under a Corporation: How to Do It Legally
Are Corporations Allowed to Own Houses?
The short answer is yes, in most jurisdictions, corporations can legally own houses. But depending on where you are, there are legal obligations. For instance:
- In the U.S.: Corporations need to register in the state where the property is located and follow federal and state tax regulations.
- In Canada: The same rules apply, though regulations may do so depending on the province.
Corporate Ownership Key Requirements:
- Registration of the corporation by the law.
- Adherence to local and federal tax regulations.
- Keeping corporate records, including annual filings.
IRS and Tax Implications
And, of course, the IRS (Internal Revenue Service) views properties owned by corporations differently than properties owned personally. Here’s how:
- Tax Treatment: Rental income, if the property is rented out, is considered corporate income and is taxed. Repairs, depreciation, and property management fees may be deductible.
- Self-rental: Renting the property back from yourself is another potential red flag for the IRS.
- Working with a tax pro to avoid potential pitfalls is always a wise move.
How to Buy a House Under a Corporation
Establishing the Corporation
Related: The initial step is creating a corporation Here’s how:
- Pick the Right Structure: For the majority of real estate buyers, LLC is typically the best option as it provides liability protection while offering tax benefits as well.
- How to Register the Corporation: You will file paperwork with your state or country’s business registration office.
Securing Financing
It can be more difficult to get a loan on a corporate-owned property than on one that is personally owned. Here’s why:
- Lenders Consider Corporations a Higher Risk: In particular, newly formed corporations may not have established a credit history, which can make it more challenging to obtain a mortgage.
- Establishing Credit: Establish your corporation’s credibility by keeping clean records, paying bills on time, and having a constant cash flow.
Choosing and buying a property
House — Under corporation — What to consider
- Location and Purpose: Are you looking for a rental, a corporate retreat, or something else?
- Closing Process: There is typically more documentation involved than what is required for individual purchases (e.g. corporate authorization forms).
Advantages and Disadvantages of Purchasing a Home Under a Corporation
ProsConsLimited liabilityGreater initial costs Confidentiality for ownersComplicated legal and tax compliance tax deductions for business useLimited lending options for corporate entities.
Use Cases — Corporate-Owned Homes
Investment Properties
Overall, corporate ownership is preferred by many real estate investors for rental properties because tax reporting and liability protection are simplified.
Privacy Protection
Corporate ownership is best for celebrities or public figures who wish to keep their real estate holdings secret.
Business Purposes
Corporations frequently purchase houses for use as corporate retreats, employee housing, or meeting venues.
Common issues faced by KOLs and how to overcome them
Challenges
- Financing Issues: Loans are traditionally tough to obtain under a corporation, as previously mentioned.
- Compliance: Each state and country has specific rules regarding ownership of corporate properties.
Solutions
- Engage Professionals: A real estate attorney and accountant can assist with these complexities.
Alternatives to Purchasing a Home Under a Corporation
If corporate ownership doesn’t suit you, here are alternatives:
- Trusts vs Corporations: Corporations are far more complex than trusts, and while trusts can offer privacy and estate planning benefits, the use of trusts for carrying out business may be more complex than necessary.
- Personal Ownership W Liability Insurance: A less complex but less protected option.
Conclusion
Buying a house under a corporation is perfectly doable, and it can provide you with some amazing benefits (extended liability protection, tax advantages, privacy, etc.). It’s not without obstacles, however, including greater costs and an intricate set of legal requirements.
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