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Should I buy with a Trust?

Discussion in 'Accounting & Tax' started by RichardChen, 23rd Aug, 2016.

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  1. RichardChen

    RichardChen New Member

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    I'm currently in the process of getting a pre-approval for my first investment property. I was told to purchase all of my properties with a trust to prevent future risks if anything goes pear shaped.
    I know that the burrowing capacity will be weaker when applying for a pre-approval.

    - Is a trust necessary to purchase an IP?
    - Are there any tax implications with purchasing and owning properties with a trust?
    - What are the pros and cons from a tax perspective?

    Thanks,
    Richard
     
  2. larrylarry

    larrylarry Well-Known Member

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    Who told you to buy in trust? What are the reasons for buying in trust?
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Based on your post you probably shouldn't set up a trust for now - do some more research
     
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  4. Brady

    Brady Well-Known Member

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    More infomation would be required about your personal situation.

    Partner/married/kids/family?
    Occupation/employed/self-employed/chance of litigation?
    Purpose of the property, buy&hold/develop/flip?

    You really need to seek specific advise, if you have any someone has told you just that you must by in a trust without giving further reason - seek further advise.

    @Terry_w provides a large amount of free advise on the forum regarding legal/tax/trusts/structures. Might be worth speaking to him and paying him for some specific advise around your personal situation.
     
  5. Jerry O

    Jerry O Well-Known Member Premium Member

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    adding to those questions.. what industry are you working in? what sort of future risk are you trying to mitigate?
     
  6. RichardChen

    RichardChen New Member

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    Answering some of the questions;

    Who told you to buy in trust? What are the reasons for buying in trust?
    - I have heard some stories around people not covered properly from insurance companies, which ended with owners loosing their properties to pay debt.
    - My reason is to make sure I don't end up the same

    Partner/married/kids/family?
    - Single, no kids
    Occupation/employed/self-employed/chance of litigation?
    - Employed full-time, no real chance of litigation

    Purpose of the property, buy&hold/develop/flip?
    - To Buy & hold, grow portfolio

    what industry are you working in? what sort of future risk are you trying to mitigate?
    - Web design. I don't plan to start a business
    - The risks I feel would be possible is insurance not covering complicated incidents
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Think about this a bit more. How would a property held in trust help in this situation?
     
  8. Brady

    Brady Well-Known Member

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    Not a professional in accounting/lawyer/trust etc but I can't see why a trust would benefit you.
    Can't see how an insurance company would be an issue? Wouldn't you just ensure you had adiquate level of cover?
    And if it was an issue how is the trust going to protect you, what protection is it going to offer?
    '
     
  9. larrylarry

    larrylarry Well-Known Member

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    It doesn't really make sense. Insurance like landlord and building cover you for losses as a result of damage and loss to the physical property.

    Trust is not necessary at this stage.

    Perhaps what you need is a full review of your insurance policies including income protection, life insurance, Total and Permanent Disablement benefits, landlord insurance and building insurance.

    That's my view. Not legal advice.
     
  10. Hedgy

    Hedgy Well-Known Member

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    Can't comment on the pros and cons of having an IP in a trust to mitigate risk, but I can share with you a few high level pros and cons of having an IP in a trust v. having the IP in your personal name. These comments are based on my on personal circumstances of having one IP in my personal name and another IP in a trust.

    Key pros of having the IP in personal name

    1. I get the benefit of being able to negative gear the property
    2. I get the benefit of the land tax threshold (both IP are in NSW)

    Key cons of having the IP in personal name

    1. I purchased this property in 2011 and it has appreciated significantly in value since I purchased it. Conservatively it has appreciated about $500,000 in value. I am in the highest tax bracket so I'm going to feel some nasty CGT pain when I offload this property and there is nothing I can do to easy that pain unless I reduce my overall income in the year I offload the property.

    Key pro of having the IP in trust

    1. I can distribute any profit from the sale of the property among the trust beneficiaries to minimize the CGT pain (income splitting if you will). Currently my wife and I are beneficiaries and since my wife doesn't work I can distribute any profit to her and not me and thereby reduce the CGT we pay.

    Key cons of having the IP in trust

    1. Losses remain locked in the trust so you can't negative gear like you can if the property is in your personal name.

    2. No access to the land tax threshold (this property is in NSW) so I cop a nasty land tax bill each year

    3. This isn't exactly a con but more of a qualify for my point 1 on losses remaining locked in the trust, but because the losses remain locked in the trust they will accumulate each year and when you eventually sell the property those losses can be used to reduce the gain and therefore have CGT benefits when the "profit" is distributed to beneficiaries.

    Final comments

    Whether a trust is suitable for you will depend on your personal circumstances and goals--so get professional advice otherwise it could be very costly. My trust is a discretionary trust and so other forms of trusts (e.g., unit trust) may or may not be better suited to your circumstances. I'm sure others will chime in on my comments above, but for me they are the big issues for me from a tax perspective.

    Good luck and do your homework.
     
  11. RichardChen

    RichardChen New Member

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    Some good information here I appreciate it, especially from @Hedgy
    I will speak to a professional get a better grasp of my situation. I will definitely keep the points mentioned above in mind when considering my options.

    Thanks for the info guys