Structuring Your Property Investment
There are multiple ways in which you can structure your property purchase. Each structure has pros and cons – but each should be considered when purchasing a new investment property and sometimes for the primary residence. Many of the advantages are not immediately apparent due to the long-term nature of property holdings. Given the significant tax and stamp duty costs of restructuring, you want to make sure you get it right to begin with.
You should always take into account asset protection and tax benefits, and the ideal structure for your property will largely depend your individual circumstances.
Among other factors:
- Is the property being acquired as an investment or principal place of residence?
- If as an investment, will it be positive or negatively geared (i.e. will expenses be greater or less than the rental income)?
- Are you operating a business that may expose you personally to creditors?
- Do you have multiple properties already (meaning you are paying a high amount of land tax?)
- Are you on a high marginal tax rate?
- Do you have family members on lower marginal tax rates?
- How valuable is the property?
- The investment plan / exit strategy.
Individual / Joint proprietors
The simplest approach is to buy property is under your own name or joint names with your partner. It is generally the quickest and cheapest method from an up-front perspective.
However, owning a property personally can have asset protection risks.
If your property is negatively geared, having your property under your name provides a real benefit at tax time. For tax purposes, any losses may offset your income thus requiring you to pay less tax.
However when your investment property begins to generate income, you may end up paying a higher amount than with other structures.
Separately, as you have more properties in personal names, your land tax bill is proportionally higher as the rates increase based on your total value of all properties when using this structure.
On disposal, you are generally entitled to the 50% capital gains tax discount where the property is held for greater than 12 months.
Using a company to hold your investment separates yourself as an individual from the investment providing some legal protection for your investment property from any personal creditors. The risk decreases if you are not personally holding the shares in the company.
Having a negatively geared property under a corporate structure doesn’t provide the same tax benefits as it does for an individual. The loss cannot be used to offset personal income and will be carried forward in the company. The main reason companies are not commonly used for holding property is the loss of the 50% capital gains tax discount.
Holding your investment property through a trust has asset protection benefits. The beneficiaries of the trust are not the legal owners of the property and therefore, the beneficiaries’ creditors will have difficulty trying to access the asset.
Having a trust to hold your investment allows the trustee to delegate who benefits from the income of the trust. When your property is positively geared, you’re able to distribute the income respective to the tax position of each beneficiary per financial year. The capital gains tax discount is also available to trusts.
There are also potential land tax savings from using a trust, and allows easy succession planning for future generations.
Similar to a company, you are unable to utilize losses in a trust against personal income.
How we can assist
We can discuss your individual needs and plans to ensure you are using the most appropriate structure for your acquisition. Being well versed with property structures, we can also assist in ensuring the conveyancing process runs efficiently.
If you are not sure which structure is the most suitable give us a call on 9942 7790 and we can assist.
The information in this article is for general interest and is not intended as advice. For advice and planning, consult an experienced tax professional.