WHICH LEGAL STRUCTURE?
YOU CAN own rental property either in your personal capacity or in the name of a company, or in a trust. It’s a personal decision, Michelle Dickens says, and it depends on how big you want to grow in owning and letting properties. You need to consider the following:
• In each case, you are “making money off other people’s money” by buying a property with a loan and getting the tenant to repay the loan on your behalf.
• It’s difficult to get a number of mortgage bonds with the banks if you are operating in your personal capacity, Dickens says.
• If you are operating in your personal capacity, you will pay income tax at your marginal rate (up to 45%) on your rental income, whereas a company will pay tax on profits at a flat rate of 28%.
• If you own several properties within a company structure, losses on one property can be offset against gains on others when reporting to the taxman, whereas they have to be reported separately if you are operating as an individual.
• Regarding capital gains tax on selling a property, companies pay a flat 22.4%, whereas individuals pay an effective 18% on the highest 45% marginal rate (not allowing for exemptions).
• If buying off-plan, either as an individual or a company, you have a taxable allowance under section 13 of the Income Tax Act that allows you to claim 55% of the purchase price over five years.
• Trusts have largely become uneconomical vehicles in which to hold rental properties because of their high tax rates.