Investing in Real Estate 104 (Structure)

Hi guys! How y’all going?

Would you believe it but it’s end of January already!

Does time fly fast eh – they say that most New Year’s Resolutions don’t last past January.

But I think when you have a steady 9 to 5, active social calendar and fully booked weekend – no WONDER we find it hard to accomplish our goals.

Throw in a kid or two in the mix and you’re dunne like a bunne.

That’s why time is the most valuable commodity of all – it’s finite, you can never get it back.

I try and make sure to use it as wisely and efficiently as possible.

Which is why I’m working on this blog right now!

Passion peeps, gotta do you.

Thank you all for your support through this real estate series, always great to receive feedback as we go along this journey together, Muchas Gracias!

Last time I commented on understanding leverage, your borrowing capacity and loan pre-approval – let’s get a bit more nitty gritty and try to fathom out what to consider prior to starting any research.

I mean, most people (myself included) just want to get in there, wham bam thank you ma’am and YOLO4LYF into the sunset.

Sheeeeeeet – that’s how mistakes and unwanted pregnancies happen son.

Always consider the consequences.

The absolute first consequence I should have considered when I first started out was which structure a property was to be purchased under.

WTF who cares – why does it matter?

Because numb-nuts – which entity owns the property has different tax and strategy considerations for each. You might not think it matters when you first start, but real estate investment is a long term (decades) play, it’ll cost a bomb to change later down the track.

There are a myriad of options but the most common ones are individual, company and trust.

There are others of course such as SMSF’s, Partnerships, JV’s, SPV’s etc – TOO MANY OKAY, GIVE ME A BREAK.

Each person’s circumstances are unique BUT here are the main characteristics of buying property in each (under Australian jurisdiction).

Individual

Surely the simplest and cheapest option.

TheFrugalSamurai owns XYZ. So simpaul. That’s good! 

Unfortunately there is minimal asset protection – Oh that’s bad…

Any negative gearing (stay tuned for post on this) losses may offset the individual’s taxable income (high income earners usually prefer negative gearing) – That’s good!

But you will be taxed on any capital gains should you decide to sell the property – That’s bad.

Provided the property has been held for a minimum of 12 months, a 50% capital gains tax discount is available… Can I go now?

Company

A company is a separate legal entity – so if you or I set up a company to buy an investment property, and we get sued – the property should not be exposed to risk as it legally is owned by the company. Huzzah!

But wait! A company’s owner is recognized by the number of shares they hold, so if the company’s owner (a person) is sued – their shares may be at risk also, the company structure might not provide the intended asset protection feature – FML!

Also, any income derived by the company is taxed at the corporate rate of 30%. This is lower than the highest marginal personal tax rate of 47% (medicare levy included).

Unfortunately, any negative gearing loss incurred under a company entity will be stuck inside the company indefinitely, it can’t be used to offset an individual’s income. FML x2.

The good news is that this negative gearing loss may be carried forward to offset any future income and capital gains if the property is sold.

And because the Australian Tax Office is a dick – a company is not eligible for the 50% capital gains discount on any capital gain derived. Just because.

Trust

A bit more complex here but a trust is an entity whereby a trustee looks after the trust’s assets for the benefit of the beneficiaries.

WTF does that mean?

Hm, well a simple way to explain it is to think of driving a car. The trust is the vehicle itself, a lump of metal to be driven whichever way intended. The driver (you) is the trustee, you control the action. The kids in the back seat (yours) are the beneficiaries, gotta look after those precious babies.

Swish.

Generally a trust offers reasonably effective asset protection as the beneficiaries are not entitled to any income the trust generates until the trust distributes the income (or capital gain) out.

So if you piss someone off and they want to sue you – assets held within the trust is usually safe.

PROTECTION YO.

Also to stick a middle finger to those bastards at the tax office – a trust provides flexibility in terms of income distributions because the trustee can distribute the trust income to each beneficiary at their discretion.

Similarly for distribution of capital gains, the 50% CGT discount applies if the asset is held for at least 12 months.

BUT – and there’s always a but, any negative gearing loss generated can only be offset against other income within the trust, although the losses can be carried forward indefinitely.

Hm, seems like there’s pros and cons for each entity guys and gals – so do the right thing, seek professional help.

You know, maybe an ant that specialises in accounts.

Wow am I scraping the bottom of the barrel with that one.

What do you think? Did you enjoy this post? Please help me out if you enjoyed this and click on the little “follow” button at the bottom right and be a follower. This way, you’ll never miss my words of awesomeness!

P.S. As always, the posts are opinions and thoughts of yours truly only – you should really seek your accountant or lawyer’s advice regarding which structure works best for you. Remember that every person’s circumstances is unique so seek specialised advice!