Best Practices When Setting Up Real Estate Investments

Today I came across an article by Ken Davidson an accountant from BC about corporate structure every investor should consider. This is the structure used not only in Real Estate investments but any business area. If you have inventory, if you have assets, if you deal with clients (what business doesn’t?) you are a potential target for law suit. This structure gives you maximum protection and tax benefits at the same time. Here is what Ken suggesting:

For many real estate investors that are purchasing apartments, commercial properties and multi-family homes I suggest a high level of protection from liability in a three tier system.A three tier system would consist of:

• Operating Company – Business operation
• Holding Company  – To building your family wealth
• Property Company – To hold each Complex

The operating company is where you have your day-to-day project management, and property management group – all your active business components are within this company. This is where your risk lies…if you do something wrong, it’s going to cost you. That’s why I often call this the risk company.

We first heard about this structure in one of the seminars about Real Estate few years ago when we were just starting our business. Of course we took it to our account. She like the idea of separating operating (active business) and company that holds assets (passive business) because they would have different tax rates and some other tax advantages. She even mentioned that this would make it tax beneficial for us if we decide to sell one of these corporations. But she couldn’t really understand why we need holding company in there.

So next we took it to our asset protection lawyer. He was very happy to see additional layer of protection between us and assets, making it harder to sue us but he didn’t see a real benefit of extra company under it. So our lawyer and accountant spent very entertaining 2 hours looking at different scenarios to optimize our money and help us safe it. They tried more and less complicated structures. But after all that time had to admit that this one is the best of the best.

So take it to the members of your Power Team, see for yourself what they have to say!