It is often said that to go far in real estate investment, you have to know what you want to achieve before you take the plunge – whether the final goal looks like a round number or a springboard in your next purchase.
Saying this, the vehicle in which you choose to buy property indoors should not only be based on your future goals but also match the type of property you are buying.
Wayne Jessup, real estate investment coach and director of The Property Bloke, shares that you are only able to base your buying strategy on your current situation and what you are viewing produce over a period of five years.
"You can't really see too far into the future because no one really knows, but you can set up a structure that will work," says Jessup. "Especially if it is a fiscally efficient structure, you have to get it right from the start."
It comes down to being aware of your purpose and what you expect from your asset base to achieve what you want, he adds.
"Therefore, you can buy the right way, otherwise you will end up investing for five years and you risk losing hundreds of thousands of dollars by being subject to a poor tax structure," says Jessup.
Investors are strongly anchored in the reduction of their fiscal control, but on certain occasions, they will not reap the full potential of the tax deductibility of their property because their structure does not integrate effectively into their situation personal.
Paul Wilson, Director of Income2Wealth, says: "I see people coming up with structures where they want to have a tax benefit but the tax benefit ends up being quarantined in the structure and not for the person" .
What is the purpose of the investment? – This is the golden question to which Wilson always returns.
"If [the investor is] someone with a high income tries to reduce their tax liability, it will influence the type of property they buy and it will also influence the structure in which they do so." Because there is no one size fits all, "he shares.
Buying a property under your personal name
Understanding the timing of your investment, its objective and the strategy you are adopting – whether it is a sales or holding approach – will collectively influence the purchasing structure .
Clive Nelson, partner at Chan and Naylor, states that buying property in your personal name is the most commonly used structure; especially in NSW and VIC.
"Tax is paid at your marginal tax rate on net rental income, and capital gains tax is payable in the event that the property is sold for a gain, with a 50% concession for the property that is owned for 12 months or more, "says Nelson.
People generally choose to buy on their own because it is easier when they start on a property, says Wilson of Income2Wealth.
"They have deductibility because they can have the negative benefits of depreciation and this also offers them the opportunity to reduce their wages, build an asset base and reduce their taxes – so often it's motivation, "Wilson explains.
While some investors may feel the need to set up a different structure in order to better protect themselves, Wilson suggests that sometimes "it could be like peeling an egg with a hammer".
"They may be putting in place structures that are excessive compared to the original purpose and the needs they need," he explains. "If it's a deduction so you can claim less tax personally, you want it on your own behalf."
Jessup from The Property Bloke points out that buying a property in your own name can give you access to long-term benefits once you sell.
"But the problem is, it depends on how you invest," he says. "You also have to take into account the property tax – each state has a different amount of property tax."
Nelson de Chan and Naylor note that this varies for certain development projects. "If you only buy land and then build housing, you only pay stamp duty on part of the land," he says.
Purchase of property in a corporate structure
If buying on your behalf and owning property for one year entitles you to a substantial tax deduction on sales profits, a business structure has a flat tax rate of 30%.
"There is no tax benefit for capital gains if you hold it for more than 12 months, so whether you hold it for one month or hold it for 10 years, you will still pay 30% tax, "warns Jessup.
For this reason, a business structure might work well for investors who plan to buy and sell their properties in less than 12 months; as a developer performing a quick buy, turnaround and sell.
Nelson de Chan and Naylor offers another example in which a business structure could be effective. "The corporate tax rate can be lower than a person's marginal tax rate if the property is" fiscally positive, "he says.
Concession of the property tax threshold can also be an advantage, Nelson adds.
But considering that the property becomes an asset of the business rather than the individual, Wilson of Income2Wealth says that a lender could require a personal guarantee for the loan.
"[Lenders] is not just going to lend to a limited liability company," he explains.
Purchase of property within a trust
A trust structure holds "the advantage of distribution for the minimization of tax".
This means that it allows the trustees to distribute the profits and, therefore, to decrease the overall amount of tax payable.
However, Jessup of The Property Bloke says that investors should be aware of the overall costs of operating a trust, which include set-up fees.
"[The costs] must be worth it," he says. "You wouldn't want to do it just for a smaller property, you'd probably want to buy a larger property and put it under a discretionary trust."
While Nelson de Chan and Naylor says that a trust structure is attractive to those who also want "anonymity" and "asset protection", there are different types of trusts that are offered and each one comes with various benefits and
Purchase of property jointly with a spouse
Jessup of The Property Bloke advises investors to understand how ownership of a property is to be effectively shared between a couple.
"Especially with a negatively oriented property and especially if it is a brand new property with depreciation, the majority property should be in the name of the highest incomes", shares -he.
The proportion of property that each individual should own can range from 50% to 100% or even up to 0%, according to Nelson de Chan and Naylor, and the right balance will be partly determined by "nature taxable property, the taxable nature of the individual, their property tax threshold and their personal risk outlook. "
However, Wilson of Income2Wealth says that he often sees people "stuck" when they buy a property jointly with an unrelated party, such as a friend or friend. colleague.
"They might be able to get a loan and go into a property, but what they don't realize are the long-term implications on each other's ease of service," says Wilson.
"[The lender] will assume that all the debt is yours and they will also assume that all of the debt is mine", he suggests. "But they'll only give you half the revenue, and only half the revenue for me, so our two [future] service capabilities will be greatly affected."
Purchase of a property within a super self-managed fund
There are tax advantages when purchasing a property within a self-managed super fund (SMSF). Not only is taxable income capped at 15%, but pension income in the SMSF is tax-free once you enter your retirement years.
"This also includes any capital gain on the disposal of investments," says Nelson de Chan and Naylor. "In the event that you hold a negative investment property in the SMSF, the loss on the investment property compensates for other income, including contribution income."
An SMSF is an "excellent vehicle for tax minimization," says Wilson of Income2Wealth. But he also shares the fact that financing is becoming more and more difficult to obtain and that loans are more expensive.
Those who are self-employed can own a commercial space and rent it to themselves, adds Wilson. But among some of the other restrictions, this advantage comes to residential properties.
Wilson also shares how the power of your equity can be compromised in an SMSF: "If you had equity in this property outside of [your SMSF] you can use that equity as a deposit and leverage to buy more assets, but with the super fund, your money is trapped in that asset and you cannot borrow against equity. ยป
In addition, Nelson de Chan and Naylor state that there could be the additional cost of potentially having to set up an "independent" trust, as well as the cost of meeting with a "financial planner or representative." authorized from a registered financial service organization "- who can determine if an SMSF is best suited to your goals.
Overall, buying a property under an efficient structure comes down to conducting the proper research.
"Get professional advice before buying a property; it's a big decision every time, so you have to make sure you [purchase] the right way, "shares Jessup of The Property Bloke.
There is much more strategic planning involved in establishing a trust in order to build a fiscally sound asset base.
Clive Nelson, partner at Chan and Naylor, says: "Getting the ownership structure of a property can guarantee optimal tax benefits and getting it wrong can be very costly to fix."
Nelson states some of the benefits of buying property through a trust, and a few things investors should also consider:
A trust is an attractive option when a person is looking for anonymity, asset protection or potentially a tax-efficient investment strategy.
The amount of tax you will have to pay under this purchase structure will depend on the type of trust and the nature of the investment.
The main types of trusts, excluding the retirement pension environment, include: a discretionary trust, which is often described as a "family" trust; a unitary trust; and a hybrid trust, with a variety being the real estate investors' trust.
Rather than an individual or a few individuals as trustee, we generally recommend that a business be on the property as trustee of the trust in question.
Taxable income can potentially be distributed to family members in a lower tax bracket, and negative gearing benefits are also achievable with the appropriate trust.
Opening a trust generally incurs costs, as well as the costs of establishing a trust company.
"Consulting with an experienced property tax accountant would be a good start," advises Nelson.
