I am currently a joint home owner with my principal place of residence (PPOR) home loan in both my wives and my name. We both work full-time although I am essentially the bread winner. We are wanting to use the equity we have in our current home to pay the deposit and costs for an investment property and wondered how we should structure ownership of this propoerty. We are considering re-financing our current home loan as the finance institution we are with are not structured for property investment and there will be no early exit fees. We are looking at establishing a Line of Credit and then a home loan for the new investment property, which will be negatively geared for tax incentives as I am in the super tax bracket and will work for at least the next 10 years. The questions I have are as follows:
– Should we structure our PPOR in joint names or in one name or other structure (trust)?
– How difficult is it to establish a trust and what are the downsides to this form of property ownership?
– Would we have the same structure for the investment properties?
– What structure would we choose that will give us asset protection as well as tax advantages (negative gearing, CGT)?The structure we choose should lend itself to eventually realising a passive income from all the properties we intend investing in.
I would appreciate any advice in this regard.
It is the ownership that is most important, not the names on the loan. (if both on title both will need to be on the loan anyway, if one on title you could have the loan in one name or both). Changing the loan will not result in any asset protection advantages or tax advantages.
Changing ownership from 2 to 1 will no result in any major asset protection advantages. There was a barrister called cummins who did this in 1974 and went bankrupt about 2000. The bankruptcy trustee was able to get at his half of the house almost 30 years later.
One asset protection strategy is to mortgage your house up as high as possible – but a bankruptcy trustee will look at the flow of funds too and would ask where did the money go – it may then be possible to claw it back.
For the loans I would suggest not using a LOC for the existing loan. use a IO loan with 100% offset as this is far superior.
For any equity you can use a LOC. But this should never be used for storing personal cash. Just let it sit there until you find an investment property and then take the deposit and costs of this property from the LOC. The investment property loan itself can be taken with the same bank or different and this should also be interest only.
The structure for the investment property is worth looking at. Ideally a discretionary trust should be used, but you have to weigh up the implications of land tax and if there is a loss the fact that this loss will not help you save tax against your personal income. This will provide the greatest asset protection. but even then there will be risks as the deposit you provide will be able to come under attack and then the contributions to the trust and any work you do for the trust – if you go down these can also be clawed back from the trust.
Trusts don't get the PPOR CGT exemption either.
Trusts won't allow personal negative gearing – their losess belong to the trust and can offset other trust income.
Trusts will allow the great tax flexibility in the long run but will cost in the short term.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terryw,
I appreciate the feedback.
SATD
Terryw, do you know if a trust owns a property for over 12months, if there is a 50% CGT discount like owning under your own name..
Yes trusts can access the 50% discount – actually it is the person being distributed to that does.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw, what if the profits of the sale goes to multiple beneficiary's, can they all receive the discount?
If they are people I believe so, not if companies.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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