One definition of the term “structure” is “something built or constructed, as a building, bridge or dam”.
Ironic, then, that as property investors we use the term “structure” to define how we arrange our property investment portfolios.
Like a building, our investment portfolios need to have a good structure… otherwise they’ll topple down on our heads!
The structure we establish will depend upon a variety of things: our personal situations; our goals; our financial and risk-taking capacity… in short, the investment portfolio you build will be uniquely yours.
Okay, so what is a property investing structure?
It’s simply the way we choose to take ownership of the asset (aka the investment property)… right?
Well, yes, and no. It’s simple to understand, but it can also get a little tough deciding which option is the best. Even if you’ve gone through all of the pros and cons of a certain structure and think you know which one is best for you, sometimes it helps to get an expert opinion from an experienced investor.
One of the easiest and most common ways to hold title is to hold it under a personal name. No doubt many of you reading this have property under your own name. Did you have a specific reason for doing so or did you simply do it because it was the easiest?
- Tax deductions, which can offset your income tax
- Easier to get financing
- Easy and less expensive to set up and manage
- Less paperwork required.
- Your assets are vulnerable to claims
- As negatively-geared property becomes positively geared you’ll lose your tax advantage.
As the name implies, you can own an investment property through a company name instead of in your own personal name.
- Asset protection
- Net rental income potentially taxed at a lower rate.
- Ineligible for the 50-per-cent CGT discount on any capital gain
- Expensive to set up and maintain
- Losses can only be claimed against future income
- Can be difficult to access capital to buy more properties.
A partnership is simply an agreement between individuals that allows them to pool their resources for a specific purpose.
- Fairly simple in structure and set-up costs
- Separate entity for taxation purposes
- Doesn’t pay tax, but is required to distribute income to the partners.
- Distribution flexibility is limited as payments must be made according to the partnership agreement
- No risk protection – each partner is open to creditor claims, meaning each partner is liable for the debts of the entire partnership.
A trust is a legal entity designed to provide management of assets on behalf of one or more beneficiaries.
- Set up correctly, it can provide asset protection
- Flexibility in determining beneficiary payouts, which is helpful for individual beneficiaries’ tax positions
- Access to 50-per-cent CGT discount.
- Despite the option to carry negative gearing forward indefinitely, certain requirements must be met to recoup the losses
- Can be complex and costly
- Cannot claim first homeowners’ grant
- Should you choose to live in the property before selling, you can’t claim principal place of residence exemption from the CGT
- Negative gearing losses cannot be offset against your income.
Things to consider
When deciding which type of structure you should invest in, consider the following:
- Is there a real need for asset protection?
- Who will receive the income and/or capital from the investments both now and in the future?
- Do you need the capital to be easy to access?
- What structure will suit your tax situation?
- What about estate planning?
- What are the costs involved?
- How complex does it need to be?
There’s a lot to consider when choosing an ownership structure, so it pays to get it right from the start. Not only will you save time, you’ll save money and avoid missed opportunities if you structure your investments well.