2024 Tax Deduction Guide for Property Investors
Property Investor’s Guide: Which Ownership Structure Is Best for Property Investment?
March 6, 2024 |
Are you in the market for your first or second real estate investment property and feeling uncertain about the best ownership structure? Wondering whether to split the purchase 50-50 with your partner, or consider a different percentage? Terms like ‘joint tenants’ and ‘tenants in common’ can be overwhelming, making it feel like your head is about to burst. This article aims to guide you through these complexities and help you navigate the challenges.
Choosing the right property investment structure is a critical decision that can have a significant impact on your financial success as a real estate investor. There are several options available, including individual ownership, joint ownership, and various forms of business ownership, with each structure providing different benefits and drawbacks depending on your investor profile. As a property investor, it is important to know the best structure for your situation in order to maximize the value of your property acquisition.
Common Real Estate Investment Structures
As rewarding as a property investment can be for your financial success, it is imperative to know and understand the most common investment schemes to structure your purchase before buying. Your choice of ownership structure will be influenced by your financial circumstances, risk appetite, and property portfolio objectives. A few essential factors to take into account when making your decision include safeguarding assets, tax consequences, and the expenses and intricacy of the structure. Some of the most frequently selected real estate investment structures include:
- Individual Ownership
- Joint Ownership
- Discretionary Family Trusts
- Unit Trusts
- Companies
- Self-Managed Super Funds
We’ll dive deeper into the advantages and disadvantages of each structure so you can easily make the right choice for your investment.
Individual Ownership In Property Investing – Pros & Cons
Individual ownership is the simplest and most straightforward form of property investment and is perfect for first-time investors looking to take advantage of negative gearing. You own the property in your own name and are solely responsible for any debts or liabilities associated with the investment. This structure offers maximum control and privacy, but also requires you to bear all the risks and costs of ownership.
| Advantages | Disadvantages |
| Simplest structure, minimal compliance requirements | Limited asset protections during times of financial or legal troubles |
| Claim various rental income tax deductions such as interest on your loan, rental expenses & depreciation | Income generated will be taxed at marginal tax rates, which can be as high as 47% due to the Medicare Levy |
| No setup costs | Any change in ownership will trigger Stamp duty and Capital Gain Tax |
| Access to negative gearing if you purchase using a loan (deduct losses from other taxable income) | |
| Access to the CGT 50% discount if you hold the property for longer than 12 months | Cannot split Capital Gain to reduce tax |
Joint Ownership In Property Investing – Pros & Cons
Joint ownership is another option, where two or more individuals own a property together. This can be useful if you want to share the costs and risks of property ownership with others (such as a spouse) and are looking to take advantage of negative gearing with minimal risks. There are several types of joint ownership, including tenancy in common and joint tenancy. It is important to carefully consider the implications of each type of joint ownership before making a decision.
- Tenancy In Common – Establishes two co-owners without the right of ownership; in the event of your death, your estate would take control of your stake in the property. This model is suitable for business partnerships.
- Joint Tenancy – Establishes a co-ownership situation where each party has equal ownership and in the event of a co-owner’s death, their share passes to the surviving owner. This structure is ideal for married couples or domestic partners.
| Advantages | Disadvantages |
| Simplest structure, minimal compliance requirements | Limited asset protections during times of financial or legal troubles, even if you’re not at fault |
| Claim various rental income tax deductions such as interest on your loan, rental expenses & depreciation | Changes in ownership will trigger Stamp duty and Capital Gain Tax |
| No setup costs | Any change in ownership will trigger Stamp duty and Capital Gain Tax |
| Access to negative gearing if you purchase using a loan (deduct losses from other taxable income) | |
| Access to the CGT 50% discount if you hold the property for longer than 12 months | Any income and CGT generated follows the owner and is split according to your ownership stake |
| Split property ownership stake and generated rental income based on holding percentage. For example, you could hold 1% of the property and designate 99% to your non-risk spouse (professional investment advice required). |
Property Investing Within A Discretionary Family Trust – Pros & Cons
Property investing with a discretionary family trust involves placing property ownership within the trust structure, rather than in the name of the individual investor. The trust is typically managed by a trustee, who has discretion over the distribution of assets to the beneficiaries, as specified in the trust deed.
Trusts are ideal for high-income earners looking to reduce risk, optimize tax savings and safeguard their investment, as the property is held by the trust and is generally protected from creditors in the event of bankruptcy or financial difficulties.
| Advantages | Disadvantages |
| Limited liability and increased asset protection as property is owned by the trust | Complexity and cost; setting up the trust requires annual financial compliance with detailed tax returns, financial statements, and compliance fees |
| Minimized tax obligations on any generated property income | Losses are trapped within the trust until they can be offset by profits. No tax advantage for properties that are negatively geared |
| A company can be designated as the trustee, providing even more security for property investors | Annual ASIC fee ever year |
| The trust can also be used for estate and succession planning, helping to minimize estate taxes, probate costs and secure generational wealth for your family | |
| Access to the CGT 50% discount if you hold the property for longer than 12 months | |
| Confidentiality; trusts can provide anonymity and privacy, as the identity of the beneficiaries and the details of trust assets are not publicly available |
Property Investing Within A Unit Trust – Pros & Cons
Property investing within a unit trust involves investing through a trust that holds ownership of a specific property or property portfolio. The trust is managed by a trustee, who holds the property on behalf of the unit holders, who have a fixed interest in the trust assets. Unit trusts can be thought of as a collective investment vehicle, allowing investors to pool their money to purchase larger and potentially more lucrative property investments that they may not be able to afford individually.
The property is held and managed by the trustee, and the income and capital gains generated by the property are distributed to the holders in proportion to their holdings.
| Advantages | Disadvantages |
| Allows for diversification of a property portfolio, as unit holders can spread their investment across multiple properties and partners. | Generated property income must be split according to each unitholder’s ownership stake |
| Each unitholder has a fixed ownership stake that doesn’t change | Asset protection is compromised due to the subscription of Unit holding. |
| Limited liability and increased asset protection as property is owned by the trust | Complexity and cost; setting up the trust requires annual financial compliance with detailed tax returns, financial statements, and compliance fees |
| Minimized tax obligations on individual unit holder if the unit holders borrow money to purchase units of the Trust | Losses are trapped within the trust until they can be offset by profits |
| A company can be designated as the trustee, providing even more security for property investors | Annual ASIC Fee |
| The trust can also be used for estate and succession planning, helping to minimize estate taxes, probate costs and secure generational wealth for your family. | |
| Access to the CGT 50% discount if you hold the property for longer than 12 months | To eligible Unit holders and beneficiary only |
Property Investing Using A Company – Pros & Cons
Property investing within a company structure involves owning real estate assets through a company, rather than in one’s personal capacity. The company may be a public or private limited liability company or another type of corporate entity.
Using a company to execute property investments is ideal for high-net-worth individuals who want to minimize tax obligations and arm themselves with limited liability protection, as the company is considered a separate legal entity and the shareholders’ personal assets are generally protected from the company’s debts and liabilities.
| Advantages | Disadvantages |
| Allows for investing with company tax rates (currently at 25%) | Unable to access the 50% CGT discount |
| Inherent limited liability protection as the company is considered a separate legal entity, thereby separating the shareholders’ personal assets from the company’s debts and liabilities | Increased regulatory requirements, additional costs associated with setting up and managing a company, and the requirement to file comprehensive financial and tax reports |
| Simplified ownership structure, reduced administrative costs, and a more streamlined approach to property management under one entity | Losses are trapped within the Company until they can be offset by profits |
| Taxes can be passed on to shareholders via franked dividends | No tax advantage for properties that are negatively geared |
| Generated income can be held through time for tax-advantageous payouts | Annual ASIC Fee |
Property Investing Using A Self-Managed Super Fund – Pros & Cons
Property investing with a self-managed super fund (SMSF) involves using a SMSF to purchase and hold real estate assets as part of the fund’s investment portfolio.
An SMSF is a type of superannuation fund that allows individuals to take control of their retirement savings, including the investment of those savings in real estate.
Though investing through an SMSF requires one to wait until retirement to truly realize the benefit of the investment, it is ideal for investors that are planning ahead and don’t need to sell or access income from the property.
| Advantages | Disadvantages |
| All income is taxed at a cap rate of 15% | Your investment can’t be truly accessed until you retire or reach the age of preservation |
| Eligible for capital gains discount of one-third if relevant assets had been owned for at least 12 months. | Personal use prior to retirement is forbidden and violates the investment parameters |
| Tax-free income if the property is purchased when the SMSF is still in the pension phase (when your balance is less than 1.6 million) | Subject to complex regulations and compliance requirements, and there are significant self-management on running an SMSF, including ongoing cost of audit, accounting, and legal fees |
| Secured retirement via capital growth | Investing in property through an SMSF can be more complex and time-consuming than other forms of property investment, and there is a higher degree of risk involved in managing the fund and its assets. |
What’s the best property investment structure?
Ultimately, the ideal structure for your property investment depends on your specific needs, objectives, and overall financial progress. Finding the right structure requires careful consideration and analysis of your personal circumstances. For instance, if you are a new property investor, individual or joint ownership might be the best route due to first-time investor tax advantages. If you are an established, high-net-worth individual, a trust or company structure might be ideal due to asset protection, diversification, and confidentiality benefits.
As we wrap up this exploration of property investment structures, remember that you’re not alone in this journey. Choosing the right structure can feel like navigating a maze, but it’s a decision that can significantly impact your financial future. If you’re standing at this intersection, wondering which path to take for your first or next property purchase, there’s no need to guess your way through.
Fortunately, the expertise of a property tax specialist accountant can be invaluable in guiding you to the ideal structure for your investment. If you’re currently without such a specialist or if you’re seeking a second opinion because you’re not entirely confident in your current accountant’s advice, consider reaching out to us at Investax Group. What sets our senior managers apart is not just their specialization in property tax; they are also seasoned property investors. They’ve walked the path you’re embarking on, combining firsthand investment experience with professional tax knowledge.
When you talk to someone at Investax, you’re not just consulting with someone who has an accounting degree; you’re engaging with individuals who have navigated the entire investment journey themselves. At Investax, we offer more than just advice; we share our journey and expertise to help you navigate yours with confidence.
Pro Tips for Navigating Property Investment Structures:
- Understand Your Investment Goals: Before settling on a property
investment structure, it’s crucial to have a clear picture of your long-term
financial goals. Are you investing with the ultimate aim of acquiring your
dream home? Do you plan to purchase investment properties first so you can
accumulate enough equity to be able to purchase a home in your desired
location? Or perhaps the other way around. Both paths are integral to your
long-term financial planning, but they might necessitate different investment
strategies and structures. Reflecting on these goals will significantly guide you
toward the most suitable investment structure for your needs. - Consider Asset Protection Early: Don’t overlook the importance of asset
protection, especially in the early stages of your investment journey.
Structures like trusts and companies can offer greater protection than
individual ownership but come with their own complexities and costs. - Evaluate Tax Implications: Each structure has distinct tax considerations.
Individual ownership might be simpler, but other structures like trusts or
companies could offer significant tax advantages depending on your
circumstances. Consult with a property tax specialist to understand the
nuances. - Plan for the Future: Think about not just your current situation but also your
future plans. Some structures are more flexible and adaptable to changes in
your investment strategy or personal circumstances than others. - Get Professional Advice: The world of property investment is complex, and
what works for one investor might not work for another. Engage with property
tax specialists, like those at Investax Group, who not only understand the tax
implications but also have personal experience in property investment. - Don’t Forget about Estate Planning: Your investment structure can have
significant implications for estate planning. Consider how your investment
assets will be managed or distributed in the future and choose a structure that
aligns with your estate planning goals. - Stay Informed and Flexible: Tax laws and regulations can change, impacting
the effectiveness of your chosen investment structure. Stay informed and be
prepared to adapt your strategy as needed.
We offer a 15-minute free consultation to discuss your tax, property investment and business needs. Book your complimentary consultation now.
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The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
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