Tuesday, September 17, 2013

Tools Of The Trade: 3 Tiers

I was working at the Asset Protection class with Rich Dad Education covering the benefit of setting up a three tier corporation for your real estate investment. At the same time as I received an email from a real estate investor that offers real estate information emails and webinars. This particular email covered why a three tier corporation is not of much benefit for real estate investors.

Hmmm. What a coincidence.

In the email's defence, it is true that the set up of a three tier and following legal and accounting cost are significant. If your goal for your real estate business are small, they cost associated with a three tier may not be worth while. If however you are not limiting your potential with your real estate business and you are dedicated, the benefit of the benefit of the three tier could out weight the cost.

Many people are either advised by professional and decide on their own to start their business in their own name and later switch to a three tier. It may seem like sound advice but the problem with that is that you would have to deal with the capital gain at that time making it less worth while.

Before I explain a little bit about the three tier corporation let me make sure that it is clear I am neither a lawyer or an accountant and that before you set up this type of structure for your own real estate business you should seek the expertise of  professional that have dealt with such structures.

Above is an example of the three tier structure. You are the shareholder of Holding Inc who in turn is the shareholder of Managing Inc and Real Estate Inc. Real Estate Inc as a contract with Managing Inc for managing all of it's properties. The benefit of doing this is that instead of the income being taxed as an investment income (40-45%) with Real Estate Inc, it would be taxed as an active income (15%) with the Managing Inc.

See the benefit? Also I am not touching base with  the added benefit should you be sued, which as I've been told be a fellow investor is a matter of when not of if in the rental world.

I suggest you get more education on the matter of the three tier structure and to make a decision that will best suit your personal situation.