The wHo of investing

The wHo of investing

We are coming to the tail end of how to find areas to buy in before they BOOM… in this edition we talk about wHat entity to buy the property in or, the wHo of Investing.

The nuts and bolts of this topic all refer to any tax benefits that may or may not arise during the purchase, holding and especially the sale of a property. We always recommend you speak with your Accountant and Solicitor before proceeding with any transaction with property.

Now there are several entities that you can buy a property in:

• Personal Names
  •  
    • Joint Tenants
    • Tenants in Common
• Company
• Trusts – there are too many types to list
• Self Managed Superannuation Funds ( SMSF )

Personal Names – buying in this entity generally will give you the best negative gearing benefits, if there are any, along with the least Capital Gains tax Payable. If two people are buying a property together they can buy as

• Joint Tenants – meaning they each own 50% of the property and should either party die, their share will automatically go to the other party
• Tenants In Common – means that the property can be purchased in any percentage split the buyers want. This is common when friends buy together. It can also be beneficial in a marriage arrangement where one party earns a lot more than the other. If the property is neutrally geared or close to ( that’s how we like to invest at the wHeregroup ) then it could be more tax beneficial to have the non or low income earner as the 99% Shareholder and high income earner as 1%. As the negative gearing benefits are almost zero, the benefit from this occurs when the property is sold as the non or low income worker would have a lot less Capital Gains Tax  (CGT) to pay. The other point needed to make here is that if one party dies then their percentage goes to whoever is in their Will.

Company – if you are self employed and wish to buy in your company name, this can be beneficial if the company has the funds to support the loan and ongoing costs. There is a major point that needs to be pointed out though, CGT is a flat 30% when you sell… yes 30%. The highest CGT you can pay in personal names is currently 23% so the 7% difference can be a big $$$ amount in time.

If you are in a shelf company (a company set up simply for you to buy property in ) then you really need to ask yourself wHy?

• Was this a suggestion from your solicitor or accountant?
  If so get a second and third opinion before buying.
  Is it to have a company that all funds go to through a trust?

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  • Lenders generally do not lend to these types of entities unless they are Family trusts or unit Trusts. With hundreds of millions of dollars being used to fund Terrorism through property funding, banks have simply shied away from this type of lending
  • It's usually the Solicitors and Accountants that come up with elaborate schemes for investors to buy property through. At the end of the day it's the Solicitors and Accountants who make all the money here, setting these spider web plans up as well as the annual charges that go with the audits and extra tax returns. If this happens, get a second and third opinion before proceeding
  • In a lot of Trust structures, the negative gearing benefits are limited so by buying in personal names, this could have been a lot higher giving you more cash flow to be able to buy more properties
  • Banks will only lend up to a Loan to Value Ratio (LVR) of 72%. At this LVR $100k will cover the 28% deposit required plus Stamp Duty and set up costs for a property purchase of up to $300k
  • The annual ongoing costs are around $3,000 per annum to keep a SMSF going. With $100k in your fund this is a 3% maintenance cost which is high but if you are investing in the right areas before they BOOM then it is well worth it

Is it for protection reasons? There are insurances for that…

We are yet to see a real benefit of buying this way, especially when the CGT is a flat 30%... Yuk 

Trusts – I am not going to go into the Trust side of things too much as we would need a War & Peace sized newsletter to get all the info in, it can literally be a legal mind field. There are simply so many different types,

I will however make a few valid points before entertaining this as an option:

SMSF – This is specialist buying and lending entity and is for those who have at least $100k in their superannuation fund. This can be $100k together though. The reason for the minimum amount is:

To see if this is a good option and set up your own SMSF then you first start with talking to the wHeregroup or your Financial Planner and Accountant. All three of us must be on the same page when it comes to understanding your financial plan or as we like to call, a personal investing Game Plan.  We have great relationships with both a property focused Accountant and Financial Planner.

The tax benefits for this type of investing can be fantastic, basically zero CGT if you sell after 65 years of age. You just can't personally use any of the money in your SMSF until at least 55 years of age under current legislation.

 In closing, the most common way property is purchased is in personal names, there are great tax benefits ongoing and ways to help it at the end in CGT.

 Happy Investing…