Buying your Principal Place of Residence (PPOR) in a Trust may initially seem like a strategic move for asset protection or tax planning. However, there are several significant drawbacks and complications that typically outweigh the potential benefits. Here are key reasons why you shouldn’t buy your PPOR in a trust:
- Loss of Main Residence CGT Exemption
When you sell your principal place of residence, any capital gain is generally exempt from Capital Gains Tax (CGT) under the main residence exemption. If the property is held in a trust, this exemption is not available, meaning any capital gain realized on the sale of the property would be subject to CGT, potentially resulting in a significant tax liability.
- No Land Tax Exemption
In most Australian states, your principal place of residence is exempt from land tax. However, this exemption does not apply if the property is owned by a trust. Consequently, you could be liable for land tax, which can be a substantial annual expense depending on the value of the property and the rates in your state.
- Complexity and Costs
Setting up and maintaining a trust involves legal and administrative costs. Trusts require formal documentation, regular compliance, and annual financial reporting, all of which incur ongoing expenses without generating income from the property. This complexity adds an extra layer of management that is often unnecessary for a principal place of residence.
- Financing Difficulties
Obtaining a mortgage for a property held in a trust can be more challenging than for a property held in an individual’s name. Lenders often view trust arrangements as higher risk and may require additional documentation, or larger deposits, making it more difficult and expensive to secure financing.
- Personal Use Restrictions
A property held in a trust is generally considered a trust asset, which can complicate matters if you wish to make personal use of the property. Trust laws and the trust deed may restrict how the property can be used.
In conclusion, while there are scenarios where holding property in a trust can be beneficial, these are typically not applicable to a principal place of residence. The loss of significant tax exemptions, increased costs, and complexities usually make it an unattractive option for most homeowners. For tailored advice, it’s always best to consult with Investax Property Tax Specialists who can consider your specific circumstances.
References and Further Reading
- ATO Website: Main residence exemption from CGT
- Revenue NSW: Land Tax Exemptions
