All Topics / Heads Up! / what is the right business entity ?
Hi all, I am new to this forum and am thinking of starting to invest in real estate. I am currently confused as to how to start, I mean should I put the houses I buy under my personal name or should I set up a company and put the houses under the company’s name. Also, if setting up the company is the way to go, which type of entity is better? Thank you…
– D A V E –
Hi Dave
Naturally you should get some sound advise from either a property accountant or solicitor. However in Australia if you buy in your own name or a trust and you keep the property for at least 12 months you will only be taxed on 50% of the capital gain. If on the other hand you buy in a company you will only pay 30 cents in the dollar however you will be taxed on 100% of the gain. So unless you never intend to sell the property you are probably wise not to purchase in a company.
Nigel Kibel
http://www.propertyknowhow.com.au
Australian and New Zealand Buyers advocate
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Hi Nigel, thx for the advice. Just curious though if I buy a property under my name, if something goes wrong for example the tenant hurts himself and sues me, would all my personal belongings under threat? Is this possible? Or can this scenario be prevented with insurance or other means?
– D A V E –
Hi Dave,
In Australia and NZ, I would guess that the structure of choice is a trust not a company. I personally have properties owned in trusts with a company being the trustee for the trust, and myself as director and beneficiary. Everyone is different and what works for me may not work for you, so as Nigel mentioned, getting your own independent advice is a must.
If a tenant wants to sue, they will chase the person/entity who appears on the title. If it’s a trust, they can only take what is in that trust (unless you were deliberately neglegent), if it is an individual, they can chase everything you own, if the property is not secured with enough debt.
Please note, this is only my limited understanding of a very complicated subject, Im not a solicitor, but your lawyer/accountant should be able to explain it better.
Cheers
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phone 0412 437 582, if something goes wrong for example the tenant hurts himself and sues me, would all my personal belongings under threat? Is this possible?
This is not only possible, it happens. Using a trust with a company as trustee is the best way to guard against litigation. Insurance is important but does not always cover you for what you need.
Dr X seems to know the basics but make sure the advice you get is from someone who protects his/her personal assets. This will ensure that they practice what they preach.
CATA
Asset Protection Specialist
[email protected]When applying for investment property loans, I notice that there is a question asking about whether the loan applicant is an individual or a trust.
Does this mean that loans are harder to get approved when applying as a trust ? Does it affect the interest rates as well ?
Thanks for the replies guys. I am not familiar with ‘trust’ entity. Is a trust formed between 2 people , that means you and a company you set up? And if that is so doesn’t that mean your personal name still appear in the title? Or does a trust only need to consist of 1 company name?
– D A V E –
With trust assets, the trustee’s name appears on title. This can be either a company or a individual (can also be more than one). The trustee is the legal owner, but not the beneficial owner. The beneficial owners are the long list of people listed on the trust deed.
What this means is that if you are sued, and you are the trustee of a trust, you don’t own these assets. If you have the right trust, the assets of the trust can usually not be gotten at.
That is why many people use a trust for owning property. Taxation savings is another major reason.
With running a business, it can be done through a trust, but businesses are risky, so a company may be a better option as the liability is limited. The companies shares can be owned by your trust, adding asset protection and tax advantages.
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Thanks for the explanation. I am trying to understand this concept, please correct me if I’m wrong.
So, in a trust, there are:
1. trustee or legal owner, can be one or several company or individuals. They don’t own the assets owned by the trust.
2. beneficial owner, the real owner of the assets. The beneficial owner’s name does not appear on the title therefore cannot be sued
Is this why trust is a good entity for asset protection?
– D A V E –
The only thing in the trust is assets.
The trustee (I believe) should be a $2 company with no trading history. The trustee does not own the asset but is in control what happens in the trust.The benificary of a trust is not the owner, it can receive profits/losses of the trust(depending on the type of trust)
A trust is a separate legal entity that can live for ever as long as all legal requirements are met. Assets owned by a trust are separated from you and therefore if sued you are not liableCATA
Asset Protection Specialist
[email protected]Cata, what do you mean by a $2 company?
Say a trust owns assets worth $1 million, and I personally have assets worth another $1 million. When the trust is sued, my personal $1 million is safe but the $1 million under the trust’s name is still under threat? Can the trust defer the assets to be under my personal name and therefore be safe?
– D A V E –
Hi,
A $2 company is one with little capital (i.e. $2). It is done this way so that there is very few assets to sue for in the event of legal action.
That’s why trustee companies are usually asset-bare, as accountants use this ploy to maximise asset protection.
Dave, you may like to look at a video I recorded yesterday which gives some more information about structuring. You can view it for free at: http://www.propertyinvesting.com/resources/11.html
Regards,
Steve McKnight
**********
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Thank you Steve!
– D A V E –
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