This is the question an entrepreneur friend asked me recently. His business grows, his financial resources increase, he wants to buy a house on the outskirts of Brussels. The budget that he expects to be disproportionate to the emoluments (salary) he draws from his business, he then asked me if going for a real estate company would not have been the solution.
To try to answer this question, we must first recall how real estate income is taxed in Belgium and how we can enjoy the rents collected, both as an individual and through a company. We can then position the advantages and disadvantages of each of these options before trying to answer the question.
All income that a company receives as a result of its business is in principle subject to corporation tax and most expenses are in principle deductible. As a result, the company pays 20 or 25% tax on the profit it makes. But this does not yet mean that the shareholder can dispose of the remaining sum net of taxes: for this reason he must still pay the tax on the dividend, or the withholding tax. Up to 30% if they are eager to get their money or 15% if they are willing to wait 3 to 5 years. In concrete terms, this means that the registration taxes paid on the purchase of the property are deductible from the tax base but that the capital gains (on resale) are part of the profit. These are the first two notable differences with owning real estate as an individual.
Interest on a loan is also deductible, which only applies to private individuals if you own multiple properties. It often happens that at the beginning of a mortgage loan, the interest paid fully compensates for the rents collected and clears the tax base. Furthermore, the losses incurred are generally carried forward and deductible from the profits of subsequent years. This benefits corporate ownership.
A cost … which can be “profitable”
But running a business costs, especially the accountant who will help you with the annual accounts and the tax return. A minimum of € 2,000 per year excluding VAT is enough if you want a minimum of service from the professional.
As a natural person, you are not already taxed on the building that is your place of residence. For your additional buildings, it all depends on their rental situation. If you rent them to people who do not assign them to professional activities, the tax base is the cadastral income multiplied by two factors: first an indexation by 1.8630 (for your 2021 income) then again a multiplication by 1.40. If you cross an Airbnb-like platform, you will need to split the rent collected between a share of real estate, a share of furniture, and a share of services such as breakfast or cleaning, each taxed separately.
If your tenant assigns the property to his professional activity and deducts the rent he pays you, you will be taxed in return for the rent collected, reduced by a flat rate of 40% for your expenses. It is therefore likely that this situation will cost you more than renting from a private individual.
The “net” real estate income is added to your other income to be taxed at the global rate. Therefore, starting at 41,360 euros of income in 2021, it will cost you 50% federal and regional taxes, plus those for the benefit of your municipality. If the taxman believes that your real estate income reflects a business and not a good father’s management, they may try to tax it as professional income, with social security contributions and higher rates.
One way to reduce this tax base is to have financial interests in other buildings. This is true in society as well as in individuals. Therefore, by having the credit paid from the rents collected and taking advantage of the interest deduction from the taxable income to pay less tax, you could increase your assets.
The differences are still significant in the sale of real estate. As a natural person, the capital gain is not taxable, it results from the management of a “good family man” and that the property has been owned for more than five years. So it is a good operation.
On the other hand, it is still taxable in a company and you still have to pay withholding tax as described above. So what to do with the leftover money after paying off its costs and debts? The solution is often to buy a new building and grow your assets. This is perhaps the main interest of the company, to promote the growth and multiplication of its assets, as long as the operational and fiscal planning is adapted.
Should you therefore buy your property as an individual or as a company? There is no absolute rule, but practice teaches that the game is not worth the candle for a single building, especially if it is your home. If, on the other hand, your goal is to build a substantial wealth, that you put the necessary means into it and that the development of a real estate asset center is a long-term project, a business structure could well meet your expectations and be more suitable.