Buying a house in a Family Trust and renting back

You could do that, but remember discretionary trusts cannot distribute losses. So if there was a loss you could not offset it against your personal income. When your property becomes positively geared, then you will have a profit which you may have to pay tax on – which you otherwise may not have had to. Then there is land tax, and CGT when you sell.

It may not be a good idea unless you are going to do it short term. ie if you intend to live in the place a short time before moving on.

And don't forget you could also rent the place furnished and claim depreciation on TVs and furniture too.

If any renovations etc were done, then the trust could claim a deduction – depending on what it was that was done it may be depreciation or a repair.

Just think of the trust as a person. They own the property, so any rent they would get would be income and any deductions could be taken off this income, including depreciation. If there is a loss, it is stuck in the trust – just as if you had a loss personally, you couldn't offset that against someone else's income

Hi MadProperty

My family discretionary trust owns a property that we live in and pay rent for.  We have no PPOR.  We are, however, in a unique situation and this arrangement benefits us for the following reasons:

1.  The property is on 46 acres.  The CGT exemption for PPOR applies to the house and surrounding 2 hectares (or acres, I'm not sure which) only.  Any capital growth in the property will be mainly in the land.  So if we ever sold it we wouldn't get any real CGT exemption anyway.

2.  We don't ever intend to sell the property.  It is an estate and will hopefully be passed down to our children when we die.  If they want to sell it when we are gone, they can pay the tax on it!

3.  It is a reasonably expensive property and the monthly repayments are substantial.  Our trust declares our rent as income and interest payments and other expenses as negative costs.  The property is negatively geared to the tune of about $30,000 pa.  However, the trust has its fingers in lots of pies and by staggering the sales of assets over the years we are able to offset income from these assets against the losses incurred in this property.

4.  We are able to buy lots of stuff for the house (lawnmower, livestock etc) and claim it all as a tax deduction.

We did our sums very carefully and spoke to our accountant about it and we were far better off buying it through the trust.  Unless you are in a particularly unique situation, I can't see how you could be better off renting a property off your family trust.  The CGT exemption is a really good reason to buy a property in your own name.  The main reason we didn't buy in our name is because we will not get the exemption anyway.

Hope that helps

Cheers

K

Hi

I am no tax expert but think Captial gains cannot be used to offset income losses. eg if your trust has a property which is negative geared, then the loss is just rolled forward each year until there is income to offset it. Captial gains are not classed as income, so if the property were to be sold, then the loss could not be used to offset the capital gain – the gain must be distributed and the income loss  carried forward.

I can think of a few reasons to own your main residence in a trust.
1) if your property is larger than 5 acres and you don't get the CGT exemption, then you may as well use a trust as you are not giving up much.
2) if your property is going to be lived in temporarily and will revert to an investment property once you move out.
3) If you already own a property which you can continue to claim as your main residence
4) asset protection

Hi Again MC

I think you can do what you describe, but are ok as long as everything is done at market rents. A trustee has a fiduciary duty to the other beneficiaries of the trust so you cannot rip them off by charging yourself a lower rent and the ATO would be concerned about this too. But if everything is above board at market rates it should be ok.

You can get the 6 year exemption from CGT, but am not so sure about the land tax as this comes under the Office of State Revenue who have different rules (Never though about this before).

Renting from the trust will run into problems if the trust has no other income as it will likely have a loss. The loss cannot be offset against your personal income.

Just to clarify, revenue losses can be offset against capital gains, but capital losses can not be offset against revenue profits.

The only reason I would recommend it is if you were in a unique situation like Linar where your home was surrounded by more than 2 hectares of land. I would say the capital gains PPOR exemptions and land tax exemption outweigh the benefits of losses in the trust, which are quarantined anyway.

Also, what happens when the rent is  more than the deductions? You will be paying income tax, as well as land tax and CGT when you sell.

To me, generally, the benefits of buying a PPOR in your own name outweigh the benefits of buying in a trust.

Trust assets are separate from personal assets. So if you were to go bankrupt they are not treated as your own – with a few exceptions such as if you transfered a property you owned to the trust with the intention to defeat creditors etc.

<font color=”#000000″>Trusts are not eligible to receive the main residence exemption for a principal place of residence, so there would be CGT payable if the house was owned by the family trust.

Secondly, how would the house be split after your death? Who would be the trustee of the trust? What if one child wants to sell and another doesn't? How would these questions be resolved? </font>

Hi Hong

Your mum should looking into setting up a discretionary trust in her will, a testamentary trust. There are some pretty good tax reasons to do so – children can receive income and are taxed on the full adult tax thresholds.

But you should also look at owning at least one property in your own names so that you can get the main residence CGT exemption – this is too good to waste.