Opinion – Grain in Grain: On your next property purchase, evaluate this to save on taxes and headache

As with any investment, also in the acquisition of real estate you should plan to find the most efficient way. When it comes to real estate, most disregard an efficient and relatively low cost way that can save you in taxes and headache. I explain below what this vehicle is and how it can help you.

Most investors who acquire properties for rent and live off real estate income make the mistake of buying them in the name of their individual.

I will give an example to illustrate.

Consider that you own two properties purchased for R$600,000 with the objective of obtaining rental income and that today have already appreciated in value to R$1 million.

According to the FipeZap portal, on average in the country, you would be earning a monthly income equivalent to 0.35% of the value of the property, net of the cost of real estate. This results in a monthly rental income of R$ 3,500.00.

If you put these properties in your name, you may have three major drawbacks.

First comes the issue of tax cost. If you already have other income taxed as a salary, this rental income will go on top of the income tax rate, ie 27.5%. Thus, you will pay BRL 962.50 monthly in tax on this rental.

The second drawback is related to its vulnerability or asset shielding. Their properties are subject to legal disputes. For example, a spousal dispute, by creditors, labor dispute in a company that you are a partner or others.

Thirdly, in the case of estate succession, in addition to having a higher transfer cost, it can still cause a fight in the family, as some heirs may want to sell the property and others do not. The legal fight can take years. In the meantime, the family can spend a lot of money on legal fees, the property depreciates and no one has access to the leftover assets.

These three drawbacks and others can be resolved with an equity holding.

An equity holding is a company created for the purpose of managing the real estate of its partners.

Financially, it may not be efficient for any real estate asset, as there are costs involved. However, the cost may be worth the simplification of the other problems mentioned.

There are two main costs for creating the holding company and maintaining it. The cost of opening the company, which can be up to R$ 1,200.00, and the monthly cost of the accountant, which can reach R$ 250.00.

In the case above, if the properties had been acquired directly by the holding company, it would have been worth the tax savings.

Instead of paying a 27.5% tax rate, income at the holding company is subject to a total tax that is between 11% and 14%. Thus, there would already be savings of up to R$ 577.50 per month. This savings would already pay the accountant’s monthly expenses and the cost of starting the business would be recovered in the fourth month.

So, if you intend to acquire a property and expect to receive a rent of more than R$ 2 thousand from it. Buying directly from a holding company is a very convenient solution.

As you and your family will own shares in the holding, you can create clauses of unseizability, incommunicability and inalienability and can protect your assets against possible legal problems such as those listed above.

Even if somehow the quotas are blocked for some legal reason, you will still be able to continue managing the properties within the company.

Finally, you can go over the years donating the company’s shares to your heirs so that you won’t have a high cost all at once and you can plan the donation.

It is important to emphasize that the holding company is not taxably efficient in managing financial resources. In this case, the investor is taxed at almost double the rate of financial investments.

Another point to consider is the moment of creation of the holding company and capitalization of the property in it. Do not leave to create the holding company after you have already acquired the property in your name, as in this case, you will pay an additional tax.

If you buy the property first in your name and then capitalize the property in the holding company, you will pay ITBI, which in São Paulo is 3% of the property’s value. In this case, the value of the properties and rental income must be greater than the aforementioned to justify the payment of ITBI.

There are other advantages to using a holding company to manage your properties. Evaluate the creation of this company before your next property purchase.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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