Asset Structuring For Property Investors 101

A crucial step often overlooked by investors. Not getting the right advice at the beginning of the process can have serious ramifications later down the track. When it comes to structuring, whether it’s for property investment, property development, a business, or any other activity, there isn’t a one-size-fits-all solution. This is because everyone’s individual circumstances are different and we need to take into account these differences when coming up with a structure that is fit-for-purpose for the specific situation at hand.

The key issues to consider when deciding on the appropriate structure include: 

• Asset protection
• Taxation
• Multiple parties
• Exit strategy
• Complexity
• Cost

Your Options

There are a number of options when it comes to selecting an entity to hold your investment property. These include:

• Individual

By far the simplest and cheapest option when it comes to buying an investment property. This option provides very little asset protection, however, any negative gearing benefits can easily be used to offset other income of the individual (note, negative gearing is subject to government policy and change). The other benefit of holding an investment property as an individual comes in the capacity to access the 50% capital gains discount, provided the property has been held for greater than 12 months.

• Company

Not a common structure to hold property, and rightly so for a number of reasons. Although a company can offer asset protection benefits and tax advantages, these benefits are far outweighed by downsides. The main disadvantage and often the reason why such a structure is ruled out is no access to the capital gains tax discount. For this simple reason, a company is unlikely to be used to hold appreciating assets.

• Trust

A complicated structure, expensive to set up, however, offers significant opportunities around asset protection and tax planning. Key points to consider include:

1. Control – You own nothing but control everything.
2. Asset protection - This is the most important thing a trust can offer. Due to the nature and structure of trusts assets become protected from third parties in the case of litigation.
3. Income distribution – You can distribute income across your family and pay a lower tax rate.
4. Loss of negative gearing – With trusts, you don’t get this immediate tax benet. You can, however, carry these losses forward and offset them against future profits. The small initial tax advantage of holding a property in your name is far outweighed by the distribution and transfer of control benefits of holding property in a trust structure.
5. Costs – Administration of a trust (from an accounting perspective) is complicated, hence more expensive. Take into account that the set-up fees and yearly accounting fees will also be higher because the tax return is are more complex. 
6. Borrowing – Finance is more complicated so you need advice from an investment savvy mortgage broker.
7. Partnership - It is quite common to buy property in joint names (i.e. husband and wife). When doing so there are two options to proceed:

1. As Joint Tenants
2. As Tenants in Common

A tenancy in common is a form of property ownership that does not provide any survivorship rights among the co-owners, unlike with a joint tenancy. When one tenant in common dies, that tenant's interest in the property does not automatically pass to the surviving tenants in common.

A partnership structure provides similar tax benefits to that of an individual and provides access to the capital gains discount. Such a structure offers very little asset protection.

Get The Right Advice

It is crucial you get the right advice from a property investment savvy accountant at the beginning of your wealth creation journey. Structuring your purchase correctly can save you big time in the future. Getting it right from the beginning will ensure protection is maximised, tax planning is optimised and the appropriate exit strategy is achievable.