Best Structure for Investment Property

Hi,

Long-time lurker, first time poster. I'm looking to buy my second IP and hoping for some advice on the best structure. I will work with a solicitor & accountant, but like to have some knowledge beforehand.

Would you recommend purchasing in a trust structure (discretionary trust, corporate trustee) or purchasing just under a company? My main concerns with the trust structure are that
a) It's likely after depreciation that the property will have a nett loss for the first couple of years and I know you cannot distribute losses from a trust
and
b) That a trust vests after 80 years. I know this is a long way away, but I still hate knowing that it will happen to whatever future generation.

Thanks in advance for your help. And if anyone has any good recommendations for an accountant and broker in the mean time, I'd appreciate that too (looking at PassGo for broker and Price Accounting).

 

What do you think are the advantages of a disc trust? why are you even thinking about using one?

 

It was more just something that's come up in research. Do you suggest otherwise? I'm very much looking for opinions so I know the questions to ask when I get started. Would you suggest just owning the property under a company?

 

Each structure has advantages and disadvantages. You need to understand them and decide whats the most important to you, such as

Asset protection. Tax losses against your income. Future taxable income when it becomes positive. CG discount. Ability to refinance. Ability to live in it. How long to hold it for. Tax planning for descendants, death, divorce, insanity, stupidity, etc.

 

I think Trainee's question is along the lines of trying to understand the purpose as to why you want to use a trust of company structure. You should definitely chat to an accountant and get the pros & cons and what strategy would be best applicable for your situation. We use Paul @ Price Accounting too.

 

Thanks for your replies. I've been doing research, and I guess that's why I've come here, to understand others' opinions also. Might be best to just go straight to an accountant.

Still interested in your opinions or how you structure your portfolio, if you're willing to share.

 

We keep it simple with our IP portfolio & they're kept under individual names. Diversified across different states to help minimize land tax. Our development projects usually held under a company structure (the vehicle may differ depending on the project) which gives us flexibility in distributing the income.

 

Thanks for sharing, appreciate it.

 

Considered the land tax implications?
Estate planning different with trusts and different again with companies.

I specialise in securing and prob less than 5% of the time would I recommend a trust to hold residential property. A company perhaps 1%

 

Thanks Terry. Might have to reach out to you later -- believe I found you on Google. How would you recommend holding? Individual names?

 

I don't know anything about you... So couldn't say

 

How is trust income calculated? What if cash flow positive / tax loss after depreciation?

Trust - discretion over distribution and CGT discount

Company - less discretion (depends on how many classes of shares) and no CGT discount to my knowledge

 

Which state ?
Land tax issues ?
Stamp duty / surcharge duty / surcharge land tax issues ?
Residency issues for a trust / company
Control and asset protection ?
Personal guarantee issues ?
LVR issues for trusts / Co ?
Net losses ?
Future CGT issues?
Potential beneficiaries?
How is it to be financed ?
....many many more issues.

While legal advice is important a early start can be to discuss the tax and borrowing issues which may validate all the reasons NOT to use a trust. I often advise people to start at this then seek legal advice IF its still valid to consider a trust. There are a lot of misconceptions with trusts. Cost has to be considered and there may be some longer term benefits but that can also pose problems. I encounter people who purchased using a trust who now seek to be non-resident. They seem surprised that its a tax problem. Income tax and state taxes !!

 

Personally I decided not to get too worried about the vesting issues with trusts 80 years on. Hopefully your grand kids will appreciate that they're getting something (I think I scored a refrigerator that nobody else wanted from my grandparents).

It would likely be a very narrow set of circumstances where a pure company ownership structure would be better than a trust with a corporate trustee.

You should understand the downsides of using a trust to invest and weigh this against the benefits. The holding costs of some of my properties are significantly higher because they're held via a trust.

In retrospect, my investments via a trust work well because I'm also self employed. If I was in a regular job and given my other personal circumstances, there wouldn't be a lot of benefit and there would be significant expenses.

Many people are sold on trusts for the simple ideal of asset protection and tax flexibility. There's a lot more too trusts than these simple concepts, which may not be worth as much as people initially believe them to be.

 

What about for commercial property?

 

That is different because of the higher risks. Probably the majority would use a company in its own right or as trustee.

 

SMSFs are very popular too. Especially when unencumbered or in use with an associates business. Low tax rates (as low as 0-% but not higher than 15%), additional land tax threshold, asset protection, independence from the business if its used by a related party can be a sound asset strategy and its even possible to double dip on contributions by maxing rents to a high market rate. A retirement enhancing structure.

 

Could you please expand on this Peter? Why do you feel they may not be worth as much as people believe?

 

Could you outline on the main reasons why you recommended a trust for residential investment property to those 5% and not to the other 95%?

From an asset protection point of view is holding an investment residential property in a trust more to protect that particular property from creditors if the owner is sued for a reason not related to the property, eg is a risky business person, or to protect the owner and their other assets if the tenant of that particular property sues?

If a property is owned in a trust and the tenant sues, is the only property at risk that same investment property, if nothing else is held in that same trust?

 

It varies but some for land tax purposes, income tax reasons, CGT reasons, asset protection, lending strategies and a combination of those.