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Top 5 Ways to Structure Your Property Purchase

May 14, 2013

Conveyancing SolutionsTop 5 Ways to Structure Your Property Purchase

When it comes to property purchases, there is no single perfect structure for any situation. Your choice of purchase structure should depend on your personal circumstances and financial goals, and advisers such as a financial adviser, accountant, or conveyancer can assist with providing useful advice on your purchase structure.

Why Structure Your Property Purchase?

A property purchase structure is to be differentiated from ownership structure. The latter usually refers to owning land as a sole tenant, tenants in common, or as joint tenants. The former is concerned with the actual purchase structure and using different legal entities to buy property.

Different property purchase structures can yield specific advantages to the buyer. For example, a company structure may offer asset protection while buying property as an individual reduces costs of compliance. Your accountant and conveyancing professional can assist with specific advice about the benefits of different structures.

1. Individual

Buying a property as a natural person or in your own name is probably the simplest way to set up your purchase.

Advantages

There are minimal compliance costs when you buy property in your own name, and there is effectively no set up cost when compared with other structures. Tax benefits include the ability to use any negative gearing losses to offset salary or investment or business income of each individual taxpayer/s.

Potential Limitations

The major potential limitation relates to capital gains tax. When the property is sold, realised capital gains will be taxed, unless the property is inherited directly. Where other capital gains tax concessions are available to the seller, this can be used to offset some of the capital gains tax payable.

2. Company

Investors can also choose to buy property through a company structure. The company structure comes with its own tax advantages, though a company is not able to claim capital gains discounts.

Advantages

While there may be asset protection advantages associated with buying through a company, the main advantage comes from the ability to fix income tax at 30 per cent. It’s also relatively easy to set up and register a company and to purchase property through a company.

Potential Limitations

While income can be fixed at 30 per cent, there are no negative gearing benefits for individual shareholders unlike in some other structures. Additionally, when the property is sold, the capital gains discount rate of 50 per cent can’t be claimed.

3. Partnership

The partnership structure can be a great option for investors seeking to climb the property ladder more quickly. Buying under partnership structure usually involves a joint tenancy or tenancy in common, and many choose to do it with a friend, family member, or their partner.

Advantages

With more partners, there may be a shorter saving time for deposit. You may also be able to choose from a wider pool of properties as you have a larger budget. Partnerships are easy and inexpensive to set up, and the negative gearing benefits are the same as individual purchases.

Potential Limitations

Entering into a partnership may come with its own risk as buying property is usually a long time commitment. The potential for disagreement or conflict can arise if the partners disagree or if one partner can’t make mortgage repayments.

4. Trust

Trusts are another effective way to structure property purchases.

Advantages

The capital gains discount applies if the property is held for more than 12 months before it’s sold. Set up correctly, trusts can provide good asset protection to investors.

Potential Limitations

Whether a unit trust or discretionary trust, negative gearing losses are usually not able to be passed on to individual investors. Additionally, trusts are relatively more complicated to set up and maintain.

5. Self-Managed Superannuation Fund

Probably one of the most exciting options for investors is buying their property through a self-management superannuation fund (‘SMSF’).

Advantages

Rental income is taxed at only 15 per cent. When investors reach the pension age, the amounts they receive from the fund will be tax free. The SMSF offers excellent asset protection features.

Potential Limitations

An SMSF can be relatively more expensive and complicated to set up and maintain. Additionally, only 15 per cent of negative gearing losses are allows to be claimed.

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