You generally buy your own home in your own name. So when you decide to invest in property, it makes sense to buy it in your own name as well – right?
Not always. Getting the ownership structure of your property wrong is one of the most costly mistakes an investor can make.
What can makes matters worse is the fact that there is no ‘one size fits all answer’ regarding which structure you should use.
“There are benefits and drawbacks to each ownership structure,” explains WSC Group CEO, David Shaw. “You should always seek personalised professional advice before you purchase a property.”
To help get you thinking about the potential options available, Shaw has outlined the pros and cons of various buying structures:
Buying in your own individual name/s:
One of the most common ownership structures is simply to buy a property in your own name or jointly with others.
“The benefits of owning your property in your own name include full access to negative gearing benefits, eligibility for a full CGT discount if the individual is an Australian resident for the whole ownership period, and possible land tax savings as compared with other structures,” Shaw says.
“Plus, it can be more cost effective to set up and maintain.”
However, owning property in your own name can limit your asset protection capabilities, particularly if you are in business for yourself.
If your property is positively geared, be mindful too that all of the income has to be declared in the name of the individual/s who own the property. This could mean almost half of your property profits could be absorbed by the tax man.
Buying in a company name:
Buying investment properties within companies has become less common over the years, because companies are not eligible for the 50% CGT discount that individuals receive if they hold a property more than 12 months.
That said, Shaw says there are some benefits to owning properties within a company structure, including increased asset protection.
“In some states, a company is eligible for its own land tax threshold – but watch out for grouping provisions. Also, if the property is positively geared, the income tax payable within the company is capped at 30%, which is much lower than the effective 49% individual top marginal rate.”
Buying in a trust:
There are two main types of trusts you can purchase property within; unit trusts (sometimes referred to as fixed trusts) and discretionary trusts (sometimes referred to as family trusts).
“The benefits of trusts include increased asset protection, particularly when using a corporate trustee, and you can access negative gearing benefits for unit trusts if your loans are structured correctly,” Shaw advises.
Furthermore, trusts are generally entitled to the 50% CGT general discount. Better still, if you’re using a discretionary trust, you have discretion as to who receives the income of the trust each year.
“The drawbacks can include the costs to set up a trust, as well as increased ongoing costs, differing land tax rules depending on the state, and negative gearing benefits can be hard to access, particularly using a discretionary trust,” Shaw adds.
“As you can see there are a lot of differing rules for each structure so it is important that you seek professional advice before you exchange contracts on a property purchase, to find the ideal solution for your situation.”