Did you know that you have many options when it comes to deciding the entity that should own your new property?
Most property buyers, even seasoned investors, default to simply buying the property in their own name, but this is not always the best and most financially savvy choice.
The legally recognised owner of a residential property can be a personal name or two or more people; a company; a trust or a self-managed super fund (SMSF).
The best option for you depends entirely on your individual circumstances and goals.
When you look at it this way, it’s easy to see then how this decision can quickly become complicated.
While it is possible to change the ownership structure at a later date, this can be costly and usually triggers payment of stamp duty and capital gains tax.
That’s why it is important to decide on the most suitable form of ownership upfront, and this will usually involve consultation with your accountant or financial advisor to determine the best name to buy in.
These may include:
Your personal name
The majority of residential property owners appear on the title with their own name, occasionally in conjunction with a partner.
Buying the property using a personal name enables owners to claim a full Capital Gains Tax (CGT) exemption when you sell.
It is also simple and easy to finance.
Investors who have a high income and want to reduce their tax bill using negative gearing can find owning a property in their own name beneficial, but if they sell their property or it becomes positively geared, keep in mind that they will have to pay tax on that income at their high personal tax rate.
While purchasing an investment property in the name of a Pty Ltd company is an option, the specifics are quite complex and it is worth getting professional advice first but generally, this can be the preference of companies looking to purchase their own corporate premises.
It is generally not suitable for owner-occupiers or residential property investors to buy a property in a company, because it will not be eligible for the full CGT exemption available, it is harder to get financing and you risk losing the property if your company gets sued.
Buying a property as a trust is an increasingly common ownership structure for residential property investors, for myriad reasons: it offers tax benefits, provides asset protection and can be a smart way of estate planning, to name a few.
A trust can be comprised of individuals or companies who are nominated beneficiaries, but they are not actually considered owners of the assets.
Many investors do this as a form of asset protection as if litigation occurs against one of the beneficiaries of the trust (YOU!), the assets of the trust are not at risk.
Owning a property through a trust can reduce the amount of tax you have to pay on the profits.
You can choose how to divide the profits between the beneficiaries and if you distribute then according to those with the lowest marginal tax rate, it can work in your favour and lower your taxable income.
On the other hand, a trust only distributes profits, not losses.
This means that negative gearing cannot be used to lower your taxes; you will have to wait until the property becomes positively geared or is sold.
A trust is most viable when you are looking to hold the property long term.
There are a number of different types of trusts so it is important to speak to your accountant to determine the best fit for your situation.
Self Managed Super Fund
As Australians become increasingly money savvy, they are beginning to manage their own super funds instead of leaving it to a third party.
Owning investment property through a Self Managed Super Fund is often a good option for those who have already accrued a considerable amount of super. (Please seek independent advice to make sure this applies to you.)
Purchasing an investment property with a SMSF can be more difficult and more costly than purchasing as an individual.
There’s lots of government red tape and regulations to wade through and lenders often require a larger deposit, offer less favourable interest rates and have higher loan setup fees.
Clearly you need to working with a professional to ensure you keep within the strict parameters of SMSF laws.
One of the main benefits to buying residential property as a SMSF owner is the low tax rate: 15% on all money currently in the fund and 0% when it is taken out after retirement.
Owning through a SMSF is only suitable for property investors, because buying a property intended for personal use (living in it or a holiday home) is not allowed.
There are pros and cons to each ownership structure for residential properties and each has inherent complexities that affect its suitability.
To determine the correct ownership structure and therefore the name that will appear on the title document of your next property, discuss your situation and goals with your accountant to ensure the best and most profitable outcome.
Of course if you use the team at Metropole to help you formulate your property strategy, we discuss much more than which property to buy.
In fact before we commence any property search we refer our clients to appropriate consultants to ensure they have the correct ownership structures set up and have the correct finance in place.
If you’re looking for independent property investment advice to help you become financially independent, including how to get he banks to say yes more often to you, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties on the market to sell, so their advice is unbiased.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
Please click here to organise a time for a chat. Or call us on 1300 20 30 30.
When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.