There are many things to consider when purchasing a property, such as whose name should the property be bought in and whether a Trust is appropriate.
For example you may buy it in the name of the spouse who is paying the highest income tax rate so they can get the largest refund cheque from the ATO, but that may add to your land tax problems because land tax is based on the number of properties you own and only your home is exempt from land tax, however every State in Australia has a different land tax threshold before land tax is payable. Every additional property would push you either closer to the threshold or push you above the land tax threshold.
Also the person who is on the highest tax rate could potentially be in an occupation that exposes him/her to litigation, such as a doctor, a self employed person or a business person such as a Company Director.
So having the property in their name is foolish from an asset protection point of view. Should he/she get sued then all assets, such as property that is in their name, are exposed to litigation.
Also the property generally starts off being negatively geared and eventually becomes positively geared. Once it’s positively geared then the positive rental is taxed at that person’s marginal tax rate.
Should the property be sold, the capital gains tax will also be paid at that person’s marginal tax rate.
Further, if you want to pass the property over to your child later on they will need to pay stamp duty and you will pay capital gains tax.
Purchasing property in a Trust specifically for investment eliminates a lot of these problems and in some States even gets you a new land tax threshold, thus minimizing and in some cases eliminating land tax entirely.
For example if you wanted to pass the property to your son, there is no stamp duty if held in a Property Investor’s Trust and you will still be able to claim the negative gearing against the spouse who is on the highest tax rate.
The property is safe from litigation because it’s not held in your or your spouse’s name. Also you can move the ownership anywhere without stamp duty.
A Property Investor’s Trust provides a lot of flexibility, especially if you don’t know what will happen in the future.
Property is very expensive to move around if held in the wrong entity or if you want to change the title because your circumstances alter.
Some say that the only things certain in life are taxes and death. However there is a third thing that is absolutely certain and that is, your circumstances will change in the future and you want an entity that is flexible and can change with you, without costing you a lot of tax and other expenses.
Examples of changing circumstances include; being single today and then getting married, or having children. You may not be working right now, but you might plan to work in the future or you stop working to have children. Perhaps you plan to retire soon, or get divorced and either stay single or remarry.
Whatever happens, things are certain to change in the future, so it’s best that the property is held in something that gives you lots of flexibility like a Property Investor’s Trust.
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