Depreciation & Tax on Negative geared IP in Company/Trust structure

Hi there,

I'll try and answer your questions.

1)  Correct, only profit can be distribuited from a trust, and losses stay in the trust, to offset future income. The trust doesn't pay tax, it distributes profit and the beneficiaries pay tax on their share of income. But as there is no profit being distributed, there is no tax payable. The losses in the trust can be offset by either future profits, or future capital gains. 

2) Building dpreciation won't affect your cashflow, as depreciation is not a cash expense. 

3) Land tax would definitely be an expense, as it is a cost that you will incur in owning the property. 

Be careful buying negative cash flow property through a trust. My accountants advised me against it. You can’t pass losses through a trust. One of the major benefits of negative gearing is the tax benefit you get (if you are in a high tax bracket). If you invest with a trust you will forfeit those tax benefits.

As far as I am aware you cannot ADD a loss to your cash flow in a trust. Depreciation is a phantom loss, it doesn’t involve money out the door…it is just a loss on paper. I would look into how those losses work within a trust. I have a feeling they might be different from the usual mode of investing in your own name.

Hi Tony,

Basically, the difference is the type of trust.

You CAN claim the losses from investing in a Unit Trust, but not a Discretionary Trust. With a unit trust, you basically borrow money to buy the units in the unit trust. As you own units, and will (one day) get a share of income from the trust, you can deduct the interest expense in your own name.

With a discretionary trust, the profits are distributed at the discretion of the trustee. You could get all of the income or none of the income. As there is no connection with you and the trust (unlike the unit trust where you own a percentage of the units), you can not deduct anything in your own name.

Hi All,

I am interested in purchasing my next IP in a discretionary trust so as I do not max out my borrowing capacity when I try and purchase future IP's. My broker advised against it as I will not be able to claim the personal tax benefits of negative gearing. This is not of much concern to me as I am not in a very high tax bracket. Apart from the Land Tax differences, is there any other downfalls of purchasing in this structure as opposed to my personal name that I am missing?

Thanks everyone

Plummer

Plummer

Think you are mistaken as buying in Trust will have NO affect on your borrowing capacity.

I do not max out my borrowing capacity when I try and purchase future IP's

All of you Trust liabilities will be considered as personal liabilities so it will not improve your situation.

Richard,

I have had a read through the infamous "Page 174 of Steves Book 0-130 Properties etc" thread and am still a little confused about the whole thing and would really appreciate your opinion as I need to make a decision about this shortly.

Scenario:

I purchase IP1 in Trust A and personally guarantee the negatively geared loan.

I approach a lender and apply for another loan for IP2 in Trust B.

Question:

Generally speaking, will the lender consider the negatively geared loan I guaranteed from IP1 as a personal liability?

I am going to assume you will say yes to this.

Say I proceed with IP1 in the trust structure and wait for it to become positively geared. I then apply for the loan for IP2. Then, when the lender says "What's this guarantee all about?" I will be able to say "It's positively geared!". Generally speaking, will the lender then consider this in my application or disregard it completely?

Sorry to be so long winded!

Plummer

You may not have the $10,000 in the trust. It could be used to buy a new depreciating asset (stove, hot water service etc), or it could have been used to pay off principal, which wouldn't show in the profit calculation.

Generally, when setting up a trust, the trustee or main operator/s of the trust will have to kick in some money, to cover a deposit, legals etc. In your example, the $10,000 can either sit in the trust bank account, or be used to repay some of the initial funds lent to the trust by associated individuals.

It is still possible to 'negative gear' with a hybrid trust – but you will lose all flexibility and the asset protection will be reduced.
In the past the hybrids were set up in a way that may have been commercially unviable so the ATO disallowed teh deductions in some instances.

You will need specialist advice on this. Also watch out for difficulties in getting finance if you need the loan in the name of a non trustee.

Personal guarantees will be considered the same as if you have the loan personally. It doesn't matter whether the property is positive or negative.