Hi everyone,
My partner and I have recently purchased a second investment property. We have been advised by our accountant to set this up in a Trust (which we already have set up). Specifically a discretionary trust.
About 4 years ago I purchased my first investment property which is in my name only. We are now using the equity in this property aswell as personal savings to make this new investment.
We are not planning on having kids yet but may in the years to come. We are currently renting and are not looking to purchase our own home as we are more looking to creating financial independence for the future. Both of us are working. My partner has his own business and I am a teacher. Our goal is to continue to build a property portfolio.
What would be the best avenue for us to replicate the above process and what are your thoughts on having this second investment in a Trust?
Should we look to positively gear the investment properties so that they can fund themselves and build more equity. Especially, considering the lack of tax gains under the Trust set up.Thanks,
Amy
Hi Amy
Firstly welcome to the forum and I hope you enjoy your time with us.
Structure in regards to the loan set up and entity used to purchase is probably the most common question we get asked from clients and to be honest there is no shoe fits all approach.
There are so many variable it is not funny.
I must admit i own all of our properties in a series of Discretionary Trusts and agree with your Accountant over the entity however there are other factors to consider.
You mention you are using some of your own savings to defray the purchase price and certainly wouldnt recommend this unless it is an absolute must.
Flexibility is the key when it comes to investing although without all of the information to hand it is difficult to provide an accurate summary.
Richard Taylor | Australia's leading private lender
Just a note. Discretionary trusts are great but they don't allow you to negatively gear. So positive gearing is a (near) must if you are wanting to invest using a trust.
Using a trust gives you much better asset protection and if you are looking to buy a lot of properties then this will become important down the track.Good work buying your second property though. Most people get stuck at one and never move forward from there. Good on you taking the leap.
Ryan McLean | On Property
http://onproperty.com.au
Email MeHi Amy
I'm with Richard and Ryan, i.e. if it were me I'd put this second IP into a Discretionary Family Trust.
While you can't transfer losses out of this Trust, in the future, you could place a positive cash flow property into the Trust. In this situation the gain from the positive cash flow property could offset the negative cash flow property, already in the Trust. With the aim being to get at least a cash flow neutral position.
This cash flow neutral position would help your Trust's serviceability position, with the aim of doing it again, i.e. get a +ve cash flow property, followed by a -ve cash flow buy and hold.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Amy,
I f you have already purchased the property and unless you have a nomination clause, it may be too late to put it into the trust without incurring stamp duty again.Accountants love putting people into trusts, why – because it is more fees and work for them. It is not always in the best interest of the clients. If asset protection is critical, use a trust, if it is not, then why incur the additional costs yet?
My general view is that until your tax benefits are used, I would purchase in individual names. For the median type negatively geared property (as most capital city properties are) then 2 to 4 properties tend to utilise any tax payable and then you would consider using a trust. You have used your personal tax benefits so using a trust will not disadvantage you in the short term and there are longer term benefits, such as potential land tax (depending on state) and income distribution.
I agree with others above that if it is a positively geared property you are purchasing, use a trust.
Good luckAlso must factor in extra land tax in some instances.
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
Hi all,
Thank you so much for your comments. In the contract of sale there is a nomination clause so putting it in a trust is not really an issue. Especially, as the Trust was established prior to the purchase.
Just to give you a bit more background though…
Both IP's are apartments.
The purchase price for IP-1 was 377,000 and we have paid the 10% deposit from a LOC I have established for the 1st investment property. We are looking to rent it for approx. $300 a wk.
The first investment prior to this new purchase was heading towards becoming positively geared but running at a loss of about $4000 annually. It was bought for 255,500 (3+ yrs ago) and the market value today is about $400,000. Current rent is $300 a wk. The amount owing is about 180,000. I have a seperate LOC for $30,000 which was prior to paying the deposit for IP 2 not owing anything.We have about $60,000 in savings also.
Richard you said… "You mention you are using some of your own savings to defray the purchase price and certainly wouldnt recommend this unless it is an absolute must."
How would we go about not using this money. Do you mean that we should get a loan for the full amount including deposit, stamp duty etc? Even if that incurs morgage insurance?The new IP will initially be neg. geared but if it is in a trust would we be not better to put all our funds into this one to reduce the interest as it is not a tax deduction and then get any tax benefits from the 1st one as it is in my name.
The accountants thoughts (I think) were that because I am 30 and my partner is 36 we may look to have kids or my work position could change in the future (i.e. buy a business or change profession, kids etc) and therefore we don't want to have two properties in my name or our names so that neither IP's will get any tax benefits. She was saying something about Trusts cannot run at a loss so we would need to soak up any loss.
Just to reiterate… we are just looking at the best way to replicate what we have been able to do so far and continue to grow our property portfolio for longterm investments and financial growth. We just want to know what would be the best way of achieving this?
Thanks once again for your thoughts are any other comments would be greatly appreciated.Cheers,
Amy
Amy
If you are using your own cash that means that you will have less cash in the offset on your home which will result in higher non deductible interest payments. (maybe your non deductible debt is fully paid off?).
Trusts can run at losses and do all the time. One of mine is running at a loss now. But they must keep paying the bills somehow and they can do this buy borrowing money from you or a bank or you or someone gifting them money. There are different implications for each in terms of tax and asset protection. Which way you go with depend on whether you have non deductible debt left and your situation generally.
I would suggest you just run the figures for each scenario in a excel spreadsheet and see how much using a trust will cost you initially compared to your own names. it will likely hold you back a bit in the early years so you have to weigh up if you can handle this and if it is worth doing. Then consider the long term benefits, both tax and non tax – maybe do scenarios what if you sold in 5 years, 10 years, 20yrs etc
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
Terryw wrote:AmyIf you are using your own cash that means that you will have less cash in the offset on your home which will result in higher non deductible interest payments. (maybe your non deductible debt is fully paid off?).
Hi Terry,
I hope u don't mind me correcting you but in Amy's original post she did say "We are currently renting and are not looking to purchase our own home as we are more looking to creating financial independence for the future." So there is no issue of non-deductible interest in her case.
I'm following this post and people's input with interest, hence my correction here. Keen to know if that changes your opinion somewhat
Cheers,
EmmaThanks Emma
I read so many posts that I don't remember what the intial post was sometimes.
I would still try not to maximise borrowings and not to use the cash if possible – as you will never know when circumstances will change and Amy may decide to buy a place to live in at some stage. If that were to happen then there would be issues with tax as she would have to borrow from an investment to pay for personal. if she had borrowed max and put the cash in the offset this would result in higher deductions. But this may not be possible as she may need the cash to invest and she may never end up buying a house to live in – but it is good to plan for it if possibleTerryw | 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
Using an interest only loan with 100% offset even though you have no current PPOR gives you flexibility so if you decide to purchase a property for your own occupation in future years you are not having to pay interest on non deductible debt.
You would merely utilise the funds in the offset account and either use this as deposit or gear against the savings themselves.
This strategy just gives you maximum flexibility.
Richard Taylor | Australia's leading private lender
You must be logged in to reply to this topic. If you don't have an account, you can register here.
