Thoughts on Investing in Real Estate - Part 1

The following is the first in a three part series on Investing in Real Estate, by my Associate, Zarah Walpole. Thanks Zarah!

Real estate is hot right now. I have many clients purchasing a second property for recreational and investment purposes. I’m a real estate lawyer so, of course, I think property can be a great way to hold and grow wealth. However, it is also an area that you should enter with your eyes wide open and an awareness of the many pitfalls that can await the unwary.

Financing
First, you need to fully assess how you will finance the purchase. Different considerations come into play when mortgage companies consider properties that are owner occupied, a pure investment, leased to a 3rd party or a combination of the foregoing. Don’t assume your financing options are the same as when purchasing a home. When assessing whether you can afford your carrying costs, don’t forget to include costs such as property taxes, insurance, and maintenance fees, etc.

Tax Implications
Also, make sure you understand the tax implications related to the income earned while holding the property and the role of capital gains or losses when you the sell the property. For example, unlike the family home, the capital gains exemption will not apply. Consulting with an accountant to understand the tax implications and with a lawyer to determine if the property should be held personally, in a trust, or by a corporation can be an extremely important part of maximizing your return on investment.

Stay tuned for more on Investing in Real Estate, including renting and zoning issues!

Thoughts on Creditor-Proofing - The Matrimonial Home

Being in business carries its risks. As a sole proprietor or partner, you are personally liable for the obligations of your business. Even directors and officers are increasingly exposed to personal liability through legal and statutory obligations to shareholders, creditors, employees, the government and, in some instances, to the public. One of the risks of running a business, in whatever form, is that your assets, including your family home, could be exposed. Your first defense is to ensure your business (and its officers and directors, where applicable) is adequately insured. However, another possible line of defense is to transfer ownership of certain personal assets to a spouse who is not similarly exposed to such personal liability.

Before you transfer ownership of the family home to your spouse for the purpose of creditor-proofing, you should be aware of the following:

Timing is Everything
As a preliminary matter, the time to consider transferring ownership is well before any event that raises the prospect of personal liability has occurred. The courts can void a transfer to a spouse if it is done in order to avoid payment of impending liabilities. It is recommended that the transfer of a family home be done as part of a general plan to avoid the possibility of personal exposure that may arise in the future course of running your business.

Consequences of the Transfer – Separation or Death
You must be aware that there can be consequences to transferring your ownership to your spouse and these should be weighed carefully. If there is a marital breakdown and the spouses separate, the benefits of ownership only accrue to the title-holding spouse. There can also be consequences on the death of the title holding spouse, such as the need for probate and the payment of probate fees.

Protection of the family home from exposure to the potential liabilities of a business may be legitimate and intelligent planning. However, in deciding to do so, you should consider the effects of such a transfer in the event the of divorce or death. This decision should be made with the assistance of your lawyer and your accountant. That’s good business.