Should you go with a Holding Company and PREC arrangement?
Professional Real Estate Corporations (PRECs) can be an ideal part of a tax planning strategy for successful realtors. However, a limitation on investments prevents realtors from using their PREC to directly invest. I’ve found that realtors typically focus on real estate in their investment portfolio and this restriction poses a problem. When starting a PREC, it’s a good idea to seriously consider setting up a Holding Company at the same time. If structured properly, a realtor can still reinvest their small business profits without triggering personal taxation.
How should realtors take money out of their related companies?
For Holding Companies with passive investments, such as rental properties, the passive tax rates apply. These higher tax rates generate a Refundable Dividend Tax on Hand (RDTOH) balance, which is refunded when the dividends are paid out to the shareholder. A realtor’s tax planning strategy should focus on allocating personal income from the RDTOH account balance first, and secondly, from any Capital Dividend Account balance. The CDA accumulates the 50% non-taxable portion of capital gains and can be paid out tax free to the shareholder; however, an election must be filed correctly in order to avoid severe penalties. It is easy to incorrectly file an election so it is highly recommended that you use a designated accountant, such as a Public Business Accountant, PBA.
If a realtor still needs additional income beyond the RDTOH and CDA account, then they need to decide on whether to declare T4 management fees or T5 dividend income.
A realtor’s tax planning strategy can also be impacted by their future activities and mortgage requirements. It’s important to coordinate the tax planning with a good mortgage broker. Doing so will save yourself a lot of hassle and could get you a better mortgage rate.
Contact us if you would like to arrange an appointment with a PREC/Hold Co. accounting expert.
Solomon Nordine is the owner and president of Complete Accounting Solutions. Mr. Nordine is a Fellow Public Business Accountant (FPBA) and a United States Accountant.