Best Ownership Structure for Property Investments: Everything you need to know

An optimal investment property ownership structure can save you thousands in tax and protect your personal assets in the event of bankruptcy. But which structure would work best?

The truth is that there’s no one-size-fits-all solution. Why?

Because everyone’s situation is different.

The trick: To come up with the right structure for each situation.

Before making an offer to buy property, it is beneficial to take advice from property tax experts about the investment vehicle that should be used to make the offer.

Here are some valuable tips to help you decide on the best ownership structure for your rental property. This is the secret recipe to get BIG tax savings on your investment property and protect your assets from the risks of bankruptcy.

INVESTMENT PROPERTY OWNERSHIP STRUCTURES USED FOR BUYING PROPERTY

The popular tax investment property ownership structures  available are:

  • In your name
  • Jointly with a partner or spouse
  • Family Discretionary Trust
  • Unit Trust
  • Company
  • A combination of the above

BUYING PROPERTY IN YOUR NAME

Investing in property in your name is the simplest structure, with no setup cost and minimum compliance.

WHAT ARE THE BENEFITS?
  • No setup costs
  • Minimum compliance
  • You can negatively gear i.e. offset any tax loss on investment property against your salary income. This can save you tax and result in a refund from the tax already withheld on your salary.
WHAT ARE THE RISKS?

You are exposed to losing the property in the event of bankruptcy. Therefore, there is no protection against your property if you are unable to pay your debts even if they don’t relate to the property you own.

WHAT ABOUT TAX?

When it comes to tax, you pay at individual tax rates and can take advantage of negative gearing. Also, when you sell the investment property, you will be eligible for a 50% discount on Capital Gains effectively reducing your capital gains by half.

WHO IS THIS STRUCTURE SUITABLE FOR?

Mum and dad investors, first-time property investors, people wanting to take advantage of negative gearing or those who don’t consider asset protection a risk.

BUYING A PROPERTY WITH A PARTNER OR SPOUSE

While it’s very similar in implications for holding property in your own name, one important issue you need to consider is the percentage of holding.

JOINT TENANTS

Joint tenants hold the property equally between them and the income or loss from the property will also be split equally and addended to your individual income tax returns.

TENANTS IN COMMON

You decide the share of each spouse or partner in the property at the time of making an offer.

TAX TIPS

If the property is positively geared, it is beneficial to allocate a higher share to the spouse with a lower income and for a negatively geared property, it’s better to have a higher share for a partner with a higher income to offset the loss.

It’s best to speak to your accountant before making an offer to get this right. Taking into account your personal circumstances and any future capital gains.

WHO IS THIS STRUCTURE SUITABLE FOR?

Married or de facto couples wanting to take advantage of negative gearing or those who don’t consider asset protection a risk.

BUYING PROPERTY IN A TRUST

Holding property in a family trust can be beneficial as you don’t need to specify the share of spouses and still have the flexibility to distribute income in the most tax-effective manner from year to year.

WHAT ARE THE BENEFITS?
  • Save tax with the flexibility to stream income to beneficiaries in the most tax-effective manner to minimise tax
  • Good asset protection, especially when you have a company as a trustee
  • Estate and succession planning
  • Eligible for a 50% discount on Capital Gains Tax
WHAT ARE THE DISADVANTAGES?
  • One-time setup costs
  • Higher compliance cost for tax returns
  • Cannot distribute losses, so not suitable for holding negatively geared properties.
WHO IS THIS STRUCTURE SUITABLE FOR?

This option is great for families when income can be streamed amongst different family members at a lower rate of tax to minimise tax.

BUYING PROPERTY IN A UNIT TRUST

In a unit trust, the interest of the beneficiaries (unit holders) is fixed, just like shares in a company.

WHAT ARE THE BENEFITS?
  • Fixed interest in a trust.
  • Good asset protection, especially when you have a company as a trustee
  • Estate planning
  • Eligible for a 50% discount on Capital Gains Tax
WHAT ARE THE DISADVANTAGES?
  • Setup costs
  • Higher compliance cost for tax returns
  • Cannot distribute losses, so it’s not suitable for holding negatively geared properties.
  • No flexibility to income stream as interest in a trust is fixed
WHO IS THIS STRUCTURE FOR?

Appropriate for holding the investment properties between unrelated parties or doing joint ventures and property development.

BUYING PROPERTY THROUGH A COMPANY

A company is a legal entity in its own right and is different from its shareholders.

WHAT ARE THE BENEFITS?

There are many advantages to buying property through a company.

  • Tax rate of 27.5%
  • Ability to tax plan through dividends
  • Tax paid by the company can be franked i.e. passed on as credit to shareholders with dividends.
  • Much higher level of protection for your personal assets like the family home.
WHAT ARE THE RISKS?

Although you’re not personally liable, if you are a director, you will have legal obligations like ensuring solvent trading. Another consideration is that your compliance costs are higher.

WHAT ABOUT TAX?

Companies are not eligible for a 50% discount on capital gains that are available to trusts and individuals. So, your capital gains tax will be higher. Also, like trusts, a company cannot distribute losses, so they are not a good option if you want to negative gear.

WHO IS THIS STRUCTURE SUITABLE FOR?

A company structure is ideal for taxpayers who carry on property development business and therefore don’t expect any capital gains or negative gearing from their property portfolio.

PROPERTY IN A COMBINATION OF COMPANY AND FAMILY TRUST

You can also use more complex structuring like holding investment property in a trust with a company trustee or a company with trust as a shareholder. It’s best to take advice from an experienced accountant before deciding on any of the more complex structuring options for your property investments.

To learn more about business structures, read my blog on How to Choose a Business Structure that Saves You $$$ and Protects Your Assets

Want to find out more or receive some personalised advice?

We at Nav Accountants and Advisors are a firm of accountants specialising in property.

We can help you understand more about the investment property ownership structures that would work best for your situation.

Click the link below to book a consultation with us!

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