You would think making the right investment choice is the key to a successful property portfolio. But having the best ownership structure could be even more important to your portfolio’s profitability.
The options can, however, present as a mine field, so getting the right professional advice ahead of your first purchase is critical to minimise tax.
One ownership structure may not work for all of your investments and may need to be varied. Factors which need to be taken into account include your income, your portfolio mix, your risk profile and the number of years until you retire.
There are a range of ownership structures to be considered, including personal ownership, joint property ownership, Self-Managed Superannuation Funds (SMSF), companies and trusts.
Personal ownership is the most common approach to property ownership. It has the advantage of using any losses from negative gearing to reduce your taxable income.
This is particularly beneficial in a relationship where one partner is in a high tax bracket and the property is in the high income earner’s name. This will maximise the benefit of negative gearing. Alternatively if the property earns a taxable profit it is better placed in the low income earner’s name.
Personal owners are also eligible for a 50 per cent capital gains tax discount if the investment is held for more than 12 months.
As with most ownership structures, personal ownership does have its downsides. This ownership structure provides little, or no, asset protection compared to other structures to insulate assets from potential claims.
Alternatively a couple can have joint ownership in a property, dividing the tax benefits between them. With joint ownership of property they can either be ‘joint tenants’ where ownership is equal, or ‘tenants in common’ where each party can determine their ownership share.
As many people move to manage their own superannuation funds, property is becoming an increasingly attractive option. If your goal is to save for retirement, then adding real estate to your SMSF can provide a number of tax advantages, particularly in the short to medium term.
Any rental income on a SMSF property is taxed at just 15 per cent and capital gains at 10 per cent. These rates are likely to be much lower than your marginal tax rate. And if you hold the property until after you retire, you will not be required to pay any tax on ongoing rent, or capital gains if you sell it.
Setting up a company ownership has benefits, including good asset protection. This is because the shareholder’s liability is restricted only to their contribution to the company.
This ownership structure also works well for high-income earners because profit is taxed at a flat rate of 30 per cent. On the flipside, there is no capital gains tax discount and all profits have to be distributed equally among shareholders.
The final structure to consider is a trust, which is a very flexible option for property ownership. Property trusts also provide good asset protection because the property is not held in your personal name. This ownership structure also attracts the 50 per cent capital gains discount.
The disadvantage of a property trust is it cannot distribute losses to beneficiaries. Any loss remains within the property trust, and this can limit the benefits of negative gearing.
Becoming a property mogul is not an overnight phenomenon. It requires planning, patience and getting expert advice to guide you in the right direction. Everyone’s circumstances are different and taking ownership structure into account will help you on your way to building a successful portfolio.