A reader recently asked me this question and one that I am pondering myself as I am investigating the possibility of investing in some rental properties (not sure whether it will be commercial or residential). As a complete coincidence, please read Million Dollar Journey’s post today on rental property and income taxes and deductions as a companion piece since there is some over-lap on the tax implications of holding rental properties in a corporation. As a huge disclaimer, I speaking generally of Canadian law (although some general principles apply) and tax system and please seek independent legal and accounting advice about anything to do with your finances.

Pros:

1. Credit Proofing: The Corporation’s name is on title and not your own your so there is one less asset for a creditor to seize (although financing will still usually require a personal guarantee).
2. Exit Strategy: If you have several investors purchasing together, it may be beneficial to purchase through a corporation and enter into a shareholders agreement (which is an agreement governing the relationship between the owners of the corporation) with a “shotgun provision” (sometimes known as a buy-sell agreement). A shotgun allows you to either buy out another shareholder or be bought out. Its a much more elegant exit strategy if you want to leave before the property is sold than going to court or endlessly arguing about valuation (since in a shotgun clause, the party that triggers the clause has to set a price for what they think ownership is worth).
3. Deductions/tax rate: Subject to the below con, corporations are taxed at a lower rate than individuals.

Cons

1. Taxes: Income made from rental properties can be classified as passive income. If a corporation makes more than 10% of its income in the form of passive income, it is subject to the passive income tax rate (approx. 48% in Ontario) rather than the small business tax rate (approx. 18% in Ontario).  Your accountant can structure the corporation to be subject to the lower rate but it does require some analysis (read $$$) on their part (again, this is a general information overview of the law in Canada; I understand the U.S. has a different regime). This is a very complex topic so please speak to your accountant about this issue.
2. Costs:  Incorporating and properly organizing a company does cost money.
3. Paperwork: It is time-consuming and, frankly, annoying to do the paperwork for a corporation.

Holding a rental property in a corporation makes the most sense if you are purchasing with several other people or you intend to be in the “business” of real estate investing. If you hold a condo/townhouse and receive a few hundred dollars profit a month, it doesn’t make much sense to incorporate a corporation to hold title since the costs and opportunity costs will eat up your profit. As always, please seek professional advice. Good luck.