Structuring the purchase of your rental properties the wrong way
Disclaimer: Nothing is this article is meant to constitute financial advice of any kind, and is the opinion of the author only. Seek professional advice before making any financial decision.
Understandably when you purchase your first rental property you are trying to save as many administration costs as you can and reduce any unnecessary outlay.
Often when doing this you forget to look at the long-term strategy.
Long term strategy for purchasing rental investment properties is one that leads to more than one property purchase and often several.
Having the correct structure in place when you start is not only sensible but in the long run can save you money.
The costs for putting this in place are worth the end result.
Let’s take a look at the four possible structures you may have heard of:
1. Purchasing a property in your own name. (Sole Trader)
2. Purchasing a property in your own and another person’s name (Partnership/Joint Venture).
3. Purchasing a property through a company structure. (Company)
4. Purchasing a property through a trust. (Family Trust)
In simple terms:
1. Sole Trader
· pays tax in their own name at their own marginal tax rate (can be as high as 33c/$).
· cannot attribute income to any other family members (e.g. spouse).
· has no legal protection from creditors the debts are all personal, so he/she is personally liable.
2. Partnership/Joint Venture
· Partners pay tax in their own names (at their marginal tax rates)
· Income is split equally between the partners
· Again, has no legal protection from creditors, each member of the partnership is liable for all partnership debts (not just their own).
· Therefore, you must choose your partner or partners carefully. This also is true for a joint venture arrangement.
3. Company
· A company is taxed as a separate entity from the shareholders (owners) and the corporate tax rate is 28%.
· Company shareholders are only liable for the company’s debts up to the amount of their capital in the company.
· There are statutory (administration) duties of both directors and shareholders which need to be done.
· Look Through Companies (LTC) are companies with a special tax status which allows income or losses to flow out as if the owners were in a partnership.
4. Family Trust
· We do not normally advise for a rental investment to be owned by your family trust, due to the restriction on allocating any losses and the trustees tax rate of 33c/$.
· However, there may be circumstances where a trust is the right vehicle, such as positively geared properties and where there are beneficiaries on low marginal tax rates.
· We would recommend discussing your personal circumstances
The above summary is a very brief overview of the structures available.
There is also new tax legislation such as Brightline tests and Ring-fencing of losses which have changed the landscape for rental investors and the structures that were best prior to these coming in may not be the structure that is best for you now.
These new rules make it imperative to choose the optimal structure at the time of settling the property as there are tax consequences to restructuring later.
At Monteck Carter we can provide you with a comprehensive assessment of what structure is suitable to your personal situation. Please contact us to have a free meeting to discuss what will be best for you.
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