Together with Ken Raiss, from Chan & Naylor, we answer our reader’s question about the advantages and disadvantages of buying a property in your own name or a trust.
Kevin: We’re going to answer a question now from Dimitri. Dimitri, thank you very much for sending this into us. Let me quickly read it. “I’d like to ask one of your experts a question and have it featured in the show.” Of course. It’s our pleasure, Dimitri.
“The question is: what are the general considerations that need to be taken into account when choosing whether to buy a property in your own name or in a trust? What are the advantages and disadvantages of each, and what are the guidelines recommended to be followed deciding on the structure?”
Ken Raiss from Chan & Naylor, you have about three minutes to answer this question. Can you do it?
Ken: I’ll do it at a very high level, Dimitri. Obviously, you’ll need to come in and get some more specific advice. For a principal place of residence, we would normally say buy in your personal names for the tax and land tax benefits.
But if you’re looking for asset protection, estate planning, some flexibility – including maybe moving money to lower tax payers – then you would need to consider a trust. Also, if you’re a major or larger property investor, land tax is normally a consideration and in that instance, having structures such as trusts can reduce your land tax.
In general terms, if you have a positively geared property, maybe a quick turnaround where you want to spread that cash flow to different people, then I would use a trust such as our Business Enterprise Trust.
If it’s negatively geared and you want some of those benefits, then you have to be very careful because the ATO really looks at this. Chan & Naylor’s Property Investor Trust actually has a tax product ruling on that, so you can effectively have a trust and push negative gearing down against your wages.
I would probably never use a company if you’re an individual to buy property because you don’t get the 50% discount and you end up paying more tax anyway.
You need to have to a look at the value of those benefits that you’re trying to do, and compare that to the cost of running a structure, both the setup costs and obviously the increase to annual compliance costs.
Hopefully, that’s a high-level overview that gives you food for thought.
Kevin: Ken, just a quick question from me if I may. Is it necessary to have a different trust for every property?
Ken: No, normally not. Speaking for myself, a couple properties per trust. I look at the land tax issues, so once I fill up that trust with land, I’d move on to the next one. There’s another issue as well: asset protection. If you have too many assets in a trust, then if one tenant sues, it could be a house of cards that falls down and all your assets then in that one trust are at risk.
The land tax is the first consideration and then look at some asset protection strategies if you have a lot of assets in the same trust.
Kevin: There you go, Dimitri. As Ken said, a very top-level answer there to your question. Thank you very much for sending it in.
Ken, thank you very much for giving us your time today.
Ken: It’s a pleasure.
Ken: Well, it’s a pleasure.