Should I Buy an Investment Property in My Company Name?

I recently spoke to a developer who says he has started buying investment properties in a company name. He reckons this is the smartest way to both protect his assets and minimize his tax obligation. So what do you think? Is it a good idea or a not-so-good idea?

Before we get into that, let’s take a look at the basic structuring options for buying a property:

• Individual Entity – When you acquire property in your own personal name.

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  Partnership – When you agree to own the asset together with another person or entity.

• Trust – A legal entity that provides the control of assets to the trustee(s), an individual or company, but without granting ownership. The profits of the trust are distributed to all of the beneficiaries.

• Company – A company is a business entity owned by shareholders and run by directors.

So, which one is right for you? The answer depends on several factors, so you need to ask yourself some other important questions:

• How long will you own the property?
• Is it a rental property for income, or a value-add that you’ll soon resell?
• What will your total income be for the year, and what tax bracket will you be in due to that income?
• Do you expect a cash-flow loss on the property that you’ll want to offset against your income?
• Who do you want to receive the income from the property?
• Who do you want to receive capital proceeds from the sale of the property?
• Will you need to protect the asset from creditors?
• Are there liability concerns that require asset protection?
• What are the tax implications of the various structures?
• Are there any estate planning issues to consider?

Now is probably a good time to state the obvious: Before you make any structuring decisions, find yourself a good tax planning professional, and consider their advice.

But, before you sit down with your accountant, it’s smart to arm yourself with a basic understanding of the various structures. Let’s review a brief summary of the advantages and disadvantages of each structure.

The Pros and Cons of Owning Property as an Individual

Reasons to buy property in your personal name are as follows:

• It’s simple and informal.
• The compliance costs are very low.
• For first-time investors in quick cash deals, the tax implications are usually satisfactory.
• Cash-flow losses on rental properties can be offset against personal income to minimize tax.
• If you hold the property for more than twelve months, you can receive the 50% Capital Gains Tax (CGT) discount upon the sale.

Reasons not to buy in your personal name include:

• If you buy and sell multiple properties in a tax year, or if you already have a high income, the personal tax implications may not be optimal.
• There is virtually no asset protection available.

The Pros and Cons of Owning Property in a Partnership

Assuming you are entering the partnership in your personal name, you’ll face the same pros and cons listed above. Here are some additional considerations:

Reasons to buy in a partnership include:

• You’ll have the ability to pool financial resources and borrowing power with your partner.
• Depending on your partner’s level of skill, you may be able to leverage off their expertise.
• You can split the profits between partners for optimal tax consequences.

Reasons not to buy in a partnership are as follows:

• You are not the only decision maker, which can lead to conflicts.
• Relationships with family and friends can become strained.
• Legal complications can arise if you have not adequately protected yourself in a formal partnership agreement.
• You must share the profits with your partner, which means you make less money.
• If you own your portion in your personal name, no asset protection exists.

The Pros and Cons of Owning Property in a Discretionary Trust

A discretionary trust is often also called a family trust. I won’t go into the details of the various types of trusts, but unless you are investing through your superannuation fund, or if you are entering into a specific property deal with a group of other people, your accountant will likely steer you toward a discretionary trust.

Reasons to buy in a discretionary trust include:

• You can distribute the income and profits to beneficiaries to ensure optimal tax consequences.
• You can protect your assets from personal creditors and outside liability risks.
• The CGT discount does apply upon the sale of a property.

Reasons not to buy in a discretionary trust are as follows:

• The compliance costs of establishing and running can be high.
• You can’t distribute any cash-flow losses to offset the personal income of beneficiaries.
• Trust laws are complex and can be difficult to understand.
• There is some degree of uncertainty about the future benefits of trusts as the government can change trust laws.

The Pros and Cons of Owning Property in a Company

Reasons to buy property in a company name include:

• The maximum tax rate is 30%.
• You can split income between shareholders.

Reasons not to buy property in a company name are as follows:

• The compliance costs of establishing and running a company can be high.
• You have very little asset protection, unless the company is owned by a discretionary trust.
• Directors are often required to personally guarantee company loans.
• There is no CGT discount available upon the sale of a property.
• You can’t distribute losses to shareholders.

Is It Ever Smart to Buy Property in a Company Name?

In general, most accountants would advise against owning appreciating assets in a company name. It just doesn’t make sense when there is no CGT discount available upon the sale of the property.

Besides, you can achieve the tax and distribution benefits of buying in a company name through a discretionary trust – with a company trustee and separate company beneficiary – while still accessing the CGT discount upon the sale of the properties.

The only real downside to buying property in a trust is the inability to distribute losses, but that same limitation exists with a company. If you’re seeking to offset personal income through losses from negatively geared properties, your accountant will likely advise that your best option is to own the property in your own name, whether alone or in a partnership.

Decide Which Structure is Best Before You Buy

It’s crucial to ask this question up front. The reason is, if you decide later to change the ownership structure of your property, it’s considered a sale. This means the transfer will attract stamp duty, closing costs and capital gains tax.

Your situation is unique, so don’t rush out and make structuring decisions from what you’ve read here. Make an appointment with a reputable accountant and talk through which structure fits your situation best.

By Jason Staggers

Jason was a personal mentor working with Steve McKnight's Property Apprentices. He helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom. Jason now lives in Perth, WA where he leads Neuma Church.