Generally, a PREC cannot carry on the business of trading real estate other than providing the services of the realtor to their brokerage. However, your PREC is able to use the excess funds from your real estate business to invest in real estate such as rental properties.
This is terrific news for our realtors since most of you own multiple properties. As you leave money in your corporation you can use this to purchase future properties with corporate after-tax dollars vs personal after-tax dollars. This allows our realtors to purchase properties quicker and build wealth faster than ever before. What a win!
Should My PREC Own the Properties or a Holding Company?
Well, that depends (don’t you just love that answer). The type of structure you should undertake depends on your particular situation. The biggest risk of holding your properties within your PREC is that these assets are not protected should any claim be made against your PREC. A holding company can protect you from this exposure.
At a high level, a holding company is just like any other corporation. The main difference is that it doesn’t carry on active business. It “holds” assets that generate income, such as rental income and investment income.
If a holding company makes sense for you we want to structure it so that the excess cash of your PREC is passed up to the holding company via a tax-free dividend. The holding company can then use these funds to purchase properties or set up an investment portfolio.
Although this may seem simple, the structure can be complex which is why it’s important to work with both your accountant and lawyer when setting up the holding company.