All Topics / Help Needed! / Depreciation & Tax on Negative geared IP in Company/Trust structure
Hi all,I am planning to buy a slightly negative gear IP for future capital gain and I will buy it under the company/trust structure for asset protection purpose. The trust will buy the IP and the company will be the trustee and I will be director of the company.The house is 10 years old, so still have 30 years of building depreciation in it. The pre-tax cashflow for the house is -$100 per week without considering depreciation. my questions are:1, I understand that only profit can be distributed by a trust, loss can not be distributed. Instead loss will be offset by future profit to minimize tax on future profit. Does that mean that the company/trust do not pay tax for the negative geared property now? Will the current loss be offset by future capital gain or future positive cashflow or both? Is there an expiry date as when I have to use the loss to offset the gain?2, Say the building depreciation is 7000 per year, how will that be considered into my cashflow? Can I simply divide it by 52 weeks and add it as income into my weekly cashflow? If i calculate it this way my overall cashflow will be +$35 pw. But is this correct?3, Can land tax be declared as 'expenses' and bring down the cashflow more?A negative gear property bought under one's own name can be used to get tax benefit, apparently it is not the same case for buying under company/trust structure. It seems quite complicated, could anyone help please?Thanks a lot!Vivian
Hi there,
I'll try and answer your questions.
1) Correct, only profit can be distribuited from a trust, and losses stay in the trust, to offset future income. The trust doesn't pay tax, it distributes profit and the beneficiaries pay tax on their share of income. But as there is no profit being distributed, there is no tax payable. The losses in the trust can be offset by either future profits, or future capital gains.
2) Building dpreciation won't affect your cashflow, as depreciation is not a cash expense.
3) Land tax would definitely be an expense, as it is a cost that you will incur in owning the property.
Hi Dan,
Thanks a lot for the answers!
I am still a bit confused about the depreciation. as depreciation is not a cash expense, how can I benefit from it? Is it only applicable when the house becomes positive gear and offset again the future positive cashflow?
Thanks!
Vivian
Hi Dan,
Thanks a lot for the answers!
I am still a bit confused about the depreciation. as depreciation is not a cash expense, how can I benefit from it? Is it only applicable when the house becomes positive gear and offset again the future positive cashflow?
Thanks!
Vivian
You claim depreciation on your tax return for your investment property so you should receive a nice refund.
Be careful buying negative cash flow property through a trust. My accountants advised me against it. You can’t pass losses through a trust. One of the major benefits of negative gearing is the tax benefit you get (if you are in a high tax bracket). If you invest with a trust you will forfeit those tax benefits.
As far as I am aware you cannot ADD a loss to your cash flow in a trust. Depreciation is a phantom loss, it doesn’t involve money out the door…it is just a loss on paper. I would look into how those losses work within a trust. I have a feeling they might be different from the usual mode of investing in your own name.
Ryan McLean | On Property
http://onproperty.com.au
Email MeI was going to start another thread but my question relates to this one so here I go. I am a little confused on conflicting information I have obtained regarding negative gearing and trusts, namely unit trusts.
In Tony Melvin and Ed Chan's book "How to legally reduce your tax" they claim you can use a unit trust and as an income unit holder you can claim negative gear loses. An accountant I went to also said the same thing but then other sources I have read, including this forum have suggested that loses are trapped in a trust (all trusts .. except perhaps a hybrid one which I don't want use).
I guess my only choice now is to go to another accountant and also talk to a financial advisor but I would like to hear from others on this forum about this too.
Thanks,
TonyHi Tony,
Basically, the difference is the type of trust.
You CAN claim the losses from investing in a Unit Trust, but not a Discretionary Trust. With a unit trust, you basically borrow money to buy the units in the unit trust. As you own units, and will (one day) get a share of income from the trust, you can deduct the interest expense in your own name.
With a discretionary trust, the profits are distributed at the discretion of the trustee. You could get all of the income or none of the income. As there is no connection with you and the trust (unlike the unit trust where you own a percentage of the units), you can not deduct anything in your own name.
ryan mclean wrote:Be careful buying negative cash flow property through a trust. My accountants advised me against it. You can't pass losses through a trust. One of the major benefits of negative gearing is the tax benefit you get (if you are in a high tax bracket). If you invest with a trust you will forfeit those tax benefits.As far as I am aware you cannot ADD a loss to your cash flow in a trust. Depreciation is a phantom loss, it doesn't involve money out the door…it is just a loss on paper. I would look into how those losses work within a trust. I have a feeling they might be different from the usual mode of investing in your own name.
A trust can claim the depreciation, and it just adds to the carried forward losses. With increases in rents, one day the trust property will be (I hope) making profits. The prior years losses offset any profits before any distribution is required, and any tax payable.
So you end up getting the benefit of the losses, just not in the year they were incurred.
Hi All,
I am interested in purchasing my next IP in a discretionary trust so as I do not max out my borrowing capacity when I try and purchase future IP's. My broker advised against it as I will not be able to claim the personal tax benefits of negative gearing. This is not of much concern to me as I am not in a very high tax bracket. Apart from the Land Tax differences, is there any other downfalls of purchasing in this structure as opposed to my personal name that I am missing?
Thanks everyone
Plummer
Simon Plummer | SP
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Thanks for the prompt reply Dan, clears it right up.
Plummer
Think you are mistaken as buying in Trust will have NO affect on your borrowing capacity.
I do not max out my borrowing capacity when I try and purchase future IP's
All of you Trust liabilities will be considered as personal liabilities so it will not improve your situation.
Richard Taylor | Australia's leading private lender
Hi Richard,
Thanks for your comments.
I attended a market update run by Steve McKnight last week and he discussed (not in much detail) that if you hold property in a Trust with a Corporate Trustee, that some lenders (not all) will not consider any financial commitment you have made with the trust as neither the property or the trust will be in your name. So in your experience is this not the case?
Thanks in advance
Plummer
Simon Plummer | SP
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Richard,
I have had a read through the infamous "Page 174 of Steves Book 0-130 Properties etc" thread and am still a little confused about the whole thing and would really appreciate your opinion as I need to make a decision about this shortly.
Scenario:
I purchase IP1 in Trust A and personally guarantee the negatively geared loan.
I approach a lender and apply for another loan for IP2 in Trust B.
Question:
Generally speaking, will the lender consider the negatively geared loan I guaranteed from IP1 as a personal liability?
I am going to assume you will say yes to this.
Say I proceed with IP1 in the trust structure and wait for it to become positively geared. I then apply for the loan for IP2. Then, when the lender says "What's this guarantee all about?" I will be able to say "It's positively geared!". Generally speaking, will the lender then consider this in my application or disregard it completely?
Sorry to be so long winded!
Plummer
Simon Plummer | SP
https://www.sp.com.au
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Dan42 wrote:A trust can claim the depreciation, and it just adds to the carried forward losses. With increases in rents, one day the trust property will be (I hope) making profits. The prior years losses offset any profits before any distribution is required, and any tax payable.
So you end up getting the benefit of the losses, just not in the year they were incurred.
This is where I get confused. Because say you make $10,000 in passive income through cash flow (after expenses), but you have $10,000 of depreciation you can claim. The depreciation is a phantom loss as it doesn’t actually cost you anything at the time. This means you will still have $10,000 in your bank account that you can’t distribute to beneficiaries because technically you haven’t made any money. So my question is, what happens to this money and how can the beneficiaries get a hold of it and use it.
Ryan McLean | On Property
http://onproperty.com.au
Email Meryan mclean wrote:This is where I get confused. Because say you make $10,000 in passive income through cash flow (after expenses), but you have $10,000 of depreciation you can claim. The depreciation is a phantom loss as it doesn't actually cost you anything at the time.This means you will still have $10,000 in your bank account that you can't distribute to beneficiaries because technically you haven't made any money. So my question is, what happens to this money and how can the beneficiaries get a hold of it and use it.
You may not have the $10,000 in the trust. It could be used to buy a new depreciating asset (stove, hot water service etc), or it could have been used to pay off principal, which wouldn't show in the profit calculation.
Generally, when setting up a trust, the trustee or main operator/s of the trust will have to kick in some money, to cover a deposit, legals etc. In your example, the $10,000 can either sit in the trust bank account, or be used to repay some of the initial funds lent to the trust by associated individuals.
Hi Everyone,
I am in between the process of buying first IP.
At the moment my foucus is on negative Gearing but at the same time I don't want to pay capital gains in future. I am hoping to buy few property in the future.I have read about hybrid trust. Would anyone guide me whether it's a good idea to buy under Hybrid trust wit me and my wife being trustee ? The purpose of this would be to have asset protection just in case.
I heard and read that if you don't get it right ATO is very unfavourable on Hybrid trusts.Any suggestions
It is still possible to 'negative gear' with a hybrid trust – but you will lose all flexibility and the asset protection will be reduced.
In the past the hybrids were set up in a way that may have been commercially unviable so the ATO disallowed teh deductions in some instances.You will need specialist advice on this. Also watch out for difficulties in getting finance if you need the loan in the name of a non trustee.
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
Thanks Terry for your quick reply.
Plummer wrote:Richard,
I have had a read through the infamous "Page 174 of Steves Book 0-130 Properties etc" thread and am still a little confused about the whole thing and would really appreciate your opinion as I need to make a decision about this shortly.
Scenario:
I purchase IP1 in Trust A and personally guarantee the negatively geared loan.
I approach a lender and apply for another loan for IP2 in Trust B.
Question:
Generally speaking, will the lender consider the negatively geared loan I guaranteed from IP1 as a personal liability?
I am going to assume you will say yes to this.
Say I proceed with IP1 in the trust structure and wait for it to become positively geared. I then apply for the loan for IP2. Then, when the lender says "What's this guarantee all about?" I will be able to say "It's positively geared!". Generally speaking, will the lender then consider this in my application or disregard it completely?
Sorry to be so long winded!
Plummer
Personal guarantees will be considered the same as if you have the loan personally. It doesn't matter whether the property is positive or negative.
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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