| Buying Investment Property in a Trust
For a number of reasons, trusts are increasing in popularity as ownership structures for Australian property investors.
There are various ownership structures available to you for the purchase of investment properties. There are pros and cons for each structure.
They can have significant tax implications and can make a big difference to your overall financial situation.
Deciding on the ownership structure for your investment property can be complex and confusing. It is important to spend time researching your options. We would strongly advise you speak to a good, property focused accountant.
Before you can get any advice or make any decision, you need to determine a few details:
- Why are you buying the property?
- What purpose of the property,
- How long do you plan to hold the property for?
- What are the estimated cash-flows of the property?
These answers will allow you and your accountant to get a good long term view of your goals of the property and decide what is the best ownership structure for your property.
What is a trust structure?
Simply put – A trust is a ownership structure where a trustee carries out the business on behalf of the trust’s members (or beneficiaries). A trust is a vehicle to hold assets where the legal owner is not the beneficial or eventual owner
Using a trust creates a separation between the owner of the asset and who will gain the benefit of the asset.
A trust is established by a trust deed. The trust deed is a legal document setting out the terms where:
- The Trustee (Can be a person or a company)
- Holds the assets (in this case the property)
- In trust for the benefit of the beneficiaries of the trust.
- The trustee of the trust is the legal owner of the property
There are many different types of trusts depending on your exact needs. Commonly used trusts include:
- Self-Managed Super Fund (SMSF)
- Discretionary trusts
- Family trust
- Unit trust
- Hybrid trust
What are the advantages of using a trust for Property?
Trusts are an important tax planning tool. A properly drafted and managed trust can provide many advantages.
- Tax Planning – Provides the flexibility of distributing both income from the property and capital gains to people at the discretion of the trustee. The property income and any capital gains belong to the trust. The trust then distributes the profits based on the terms of the trust deed. Example, distributing income to family members with lower taxable income.
- Asset Protection – Using a trust will enable you to control & receive income from the property without having the property in your name. This may protect these assets in the event of legal or creditor action or going through a divorce.
- Estate planning: If set up correctly, a trust may allow you to effectively pass assets on to family members while minimising taxes and estate disputes.
What are the disadvantages of using a Trust?
- Trust ownership structures can be costly and complex to set up.
- They need their own set of accounts, documents and tax lodgements, which are usually more expensive than personal tax returns.
- Tax thresholds for trusts are different than individuals, so you may be liable for increased land tax.
- There may be capital gains tax implications if you are living in the house.
- Trusts cannot distribute losses, so you won’t be able to use negative gearing and depreciation as tax deductions.
- Taxation rules for trusts are complex and vary between different trust types.
There are both advantages and disadvantages for using a trust to invest in property. There is no perfect solution. It is vital to talk to your accountant for the best financial, tax and legal advice before you proceed.