Hi Everyone,
My wife and I are buying our first property at the moment, and making our offer tonight or tomorrow.
I was hoping for some quick advice as to wether I should take the mortgage and sign the contract in:
1) Both our names
2) Her name
3) My nameWhat are the advantages and disadvantages of the above options? We are both currently working, I'm earning 60k she is earning 40k. She plans to work for 3 more years before having kids, and we plan to move into a new place and rent this one out after about 5 years.
Any advice very much appreciated!
Cheers,
.
Too many variables to give you an accurate answer.
Depends on :
Whether you need both incomes to show serviceability, will the property every be rented out, future earning potential the list goes on and on.
One thing to be aware of get it wrong and it will be expensive.
Your mortgage broker should be able to shed more light on the plus and minuses for you.
Richard Taylor | Australia's leading private lender
Hi Richard,
Thanks for the response!
What do you mean ‘if you get it wrong it will be expensive’? I.e will it be expensive to add/remove one of our names from the contract and mortgage?
Some more information:
We plan to rent it out after 5 years, and at this time I will be earning about 20% more than now, and my wife will not be working.
Someone mentioned that for investment and tax purposes it may be better to put the property in my wife’s name… what are your thoughts on this comment?
Cheers,
.
aaabbbccc
Any change in the structure or ownership post settlement will incur stamp duty and possibly CGT so hence my comment about getting it right.
If the property is neutral or positively geared then have you considered using a DIscretionary Family Trust vehicle to acquire the asset in.
Richard Taylor | Australia's leading private lender
Hi Richard,
I am very keen to set up a family trust, however I know don't know enough about them to actually do it. Is a financial planner the best person to talk to about setting one up? Or can I set one up at the same time as I take out the mortgage?
Also I planned to take out an interest only loan with an offset account, however when I come to buy my second property and use the capital in my offset account I assume my first property would then become negatively geared? (not sure if this is correct)
What will this negative gearing mean in terms of the family trust? i.e you mentioned that it is a good idea to set one up for neutral or positive geared properties…
Thanks,
.
aaabbbccc,
Ask richard to set up one for you…
I think for the 'non-complicated' investor.. DFT is a good trust structure to use" What will this negative gearing mean in terms of the family trust? "
You can't distribute the negative income against your income… and it will trap in the trust, hence it will yield little benefit.The cost??? it depends.. who setup for you… you can get C&N who will charge you thousands dollars… and read tax ruling of hybrid trust before you set up one….
http://www.Bantacs.com.au has lots of info….or ATO website for tax ruling
Hi aaabbbccc
The DFT needs to be established prior to going to contract so normally take around 24-48 hours to prepare.
We charge around $665 + GST for a simple Trust with Personal Trustees compared to $$$$ charged by some of the major firms as GOM has mentioned.
Dont go the Hybrid route as finding someone to finance the deal can be extremely hard in the current climate.
Flexibility is the key with anything as circumstances change between settlement and 5 years down the track.
Richard Taylor | Australia's leading private lender
Hi aaabbbccc,
I'd see your accountant, ours set up our Family Trust.
If you don't have one, or if yours doesn't know enough to advise you (that happened to us)…..time to get a new accountant!
I agree with Richard, don't go for hybrid FT.
From my (limited) knowledge, holding negatively geared property in a FT is no advantage, as you pay a fee each yr, and need a separate tax return for the FT (ie it will cost you on-going$)
The benefit of a FT is that you can distribute income from it BEFORE tax eg 45% to you, 45% to partner, 10% to charity. Or when wife is not working, 100% of the income to her. Which she will pay tax on as if it was her earned income from a day job.
When I say income, that is PROFIT. So if your property is negatively geared, it makes a LOSS and the only possible advantage of holding it in a family trust is if you are pretty sure it will be positive within a couple of years, can afford the maybe $1000 pa of expenses in the meantime, and will then be able to write of previous yrs losses against current cashflow, ie not have to pay tax on the income created.MY suggestion, especially for first property, is buy in your name if you expect to take equity out of it and have it negatively geared in future ie you'll be the main tax payer, so get most benefit of tax benefit.
If expect positively geared when you rent, then buy in your wife's name, so she pays less tax on property income as she'll have no job then (lower wage bracket).Not sure you'll have benefit from FT now.
But when you come to next investment property, certainly worth it!quickchick
(Based on my understanding but please note that investmt experience is the only basis for my advice, I'm not an accountant, financial advisor etc!)
Hi aaabbbccc,
Some things to think about re family trusts. If you purchase in NSW or Victoria you will definitely incur Land Tax as Trusts do not attract the under $ exemption. This could cost you $000's per annum, not to mention what your accountant will charge to do your annual return. We pay approx. $2,500 per annum for ours and personal returns x2 so as you can see, the $ begin to add up. I agree with Quickchick that the apparent best way forward for you is to purchase in your own name. If you decide to sell after you've lived in it for 5 years any capital gain will be tax free and if you choose to rent it out capital gain is only calculated on the value when you vacate to when you sell. It means getting a valuation but will save you mega bucks! By the way, we've owned 19 investment properties and currently hold 10.
Hope this helps!Mick
Hi Richard, QuickChick and Mick.
Thanks for the advice and guidance. I think I will buy this one without using a trust, and wait until I’m earning more money to buy the next one with a trust.
Without a trust, will it make any difference if I buy the property in just my name or both me and my wifes names? I think it is necessary to get the loan with both our names for it to be approved financially…
Thanks again, it’s great to hear other people’s opinion!
.
aaabbbccc,
The property doesn't have to be in both names to get the laon in both names and you can also choose a % of ownership when in both names. Our first property was owned 95% in one name and 5% the other to help us with tax issues.My advice for you if you are going to be a successful PI is find a good accountant who is also an investor.
Mick
Dont like to disagree with Mick but these days it is not that easy and financiers are wary about 99/1 or 95/5 shares when buying as Tenants in Common.
A DFT with a single property and No Corporate Trustee will not cost you anything like $2500 per year in Accountancy fees and would be done by the average tax agent as a simple return.
I have 5 Trusts in which i hold 45 properties and whilst our records are precisely done and presented to my Accountant (Steve Hodgkinson who is a forum member) dont pay much more than what Mick has quoted and that includes a SMSF and Company return for the business.
Yes in certain States Trust's do not get the land Tax exemption however LT is only based on the Land value.
One of the biggest advantages is the flexibility of income distribution when buying in a DFT as remember what is negative or neutrally geared today will be positvely geared in the future.Any serious investor should be considering a Trust Structure.
Richard Taylor | Australia's leading private lender
Well.. if you buy apartment.. then you don't have to pay land tax..
I luv DFT because it saves by butt when my occupation being sued…
I guess that it is wisely to spread between wife's name ( becareful of divorce settlement) and DFT.
If you have only 1 DFT, you can use tax online or even simple tax agent to do it…unless you hold Hybrid trust…
GOM you are so right…………..
Richard Taylor | Australia's leading private lender
aaabbbccc,
As you can see, opinions differ from person to person and that is why we suggest you find a good accountant. Be sure to interview them and find out thier specialty and certainly recommendations in this case are great. If you're going down the track of becoming an investor, start investing now by finding a good accountant. It will make life easier down the track and help you get set up in the best possible way to see your goals become reality.Mick
Hi Richard, Mick and GOM,
Thanks for the further advice. The trust idea is sounding better and better…
Apart from the setup cost and tax-return costs are there any additional costs involved with holding a family trust? And how does it work exactly, i.e do I arrange for my employer and my wife's employer to pay our salaries into the trust (and are they usually happy to do this)? or do we put money into the trust and then redistribute it afterwards… Also are we taxed on our true personal incomes, or the incomes we draw from the trust?
If we plan to take an interest-only loan with 100% offset, and rent out the property in about 5 years, does it make more sense to put the property in my name of my wife's name or both? I assume if it is negatively geared my name is better for tax, and if positively geared then my wife's name (since she won't be earning income at that stage, except if drawn from the trust…)sorry, this was pretty much answered by quickchick above.I have arranged to meet with my accountant and a financial planner (family friend) next week, can you think of anything worth discussing with them (apart from the above) given my individual circumstances?
Thanks again,
.
Whoa, aaabbbccc…..
You're a bit mixed up!
A family trust is a structure in which to hold assets.
Your own income is taxed as personal income. No matter if you have a family trust, you can't put any income into it.
The only income a family trust will ever have, is the income from any assets owned in that structure.It may be possible IF you work as a subcontractor, to have them pay the FT (ask your acct).
Most investors have their residence (PPOR) completely separate to an investment, as it gets a bit more complicated.
But to start, it may be OK for you.
If you buy this property under a FT, you will have land tax plus annual FT fee to pay.
You will have NO INCOME from this property.
Therefore, no advantage, plus a definite disadvantage when you are living there.Later, you plan to rent it out.
To hold it in a FT, you need to have it positively geared for you to have any benefit.
ie You could then claim your losses from when you lived there, against earnings.What does positively geared/cashflow positive mean? That your mortgage is totally covered by the rental income, plus
rates, FT expenses if help in FT, plus calculate at least 1% rise in interest as rates are unlikely to stay this low for very long.
You have to have cash left over from the rent, after the above expenses, to make this positively geared.If you plan to hold this property for quite a while eg ,maybe 10+ yrs, as Richard says, it will become CF+ (unless you draw equity from it for your second home).
That's a long time to wait for any benefit from your FT, which has cost you $$ every year that you may not want to afford when your wife is not working.
A FT is a great structure for CF+ property, and as GOM says, for legal protection. But for your first property, especially personal residence initially, I think it is not in your best interests.Ask your acct and financial advisor, to explain how a FT works, what are the benefits and costs.
Then explain your strategy (include how long you expect to hold this property) and ask them if a FT is advisable as a structure to hold this property in. For you and your wife, in your situation.
If they can't do the above, interview another acct and if they can help, change acct's!quickchick
If you want to buy for PPOR.. then buy in your name or your wife's name or both.
aaabbbccc,
If you're going to be living in this place for 5 years buy it in your names as GOM & Quickchick say above. Don't go Family Trust with it. Leave that for future IP you won't live in and ask you accountant to explain the Family Trust set up to you.Mick
Hi quickchick, GOM, Mick and Richard,
Thanks for the clarification! My wife and I really appreciate all of your advice.
I look forward to asking you some more questions soon (most likely straight after I meet with our accountant and financial planner!)
Cheers,
.
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