Am I stuck buying properties in my own name ? i think so

[redsquash]

I am hoping for a second opinion so here is my post.

I have some properties which are already positively geared though only slightly.
I will purchase more, but under which structure to purchase these properties.
Fact
The properties will be negatively geared for many years. ie high LVR, depreciation etc.......

A discretionary trust will contain the losses so that is a poor choice.

My accountant who is property savvy and very knowledgeable on trusts is not confident with Hybrid Discretionary Trust and the ATO , so thats out.
ie play it safe.

My wife has no income ,so the best option as I see it is to buy in my own name and deduct taxable expenses off my personal income.I am Tending toward the top bracket prior to any deductions.
The only disadvantage is upon sale I will be hit with a large CGT, unless I start to sell when I retire and have no salaried income.The plan is buy and hold but this may not eventuate.

As properties accumulate I think I will continue to be forced to buy with High Capital Gain in mind but which will tend to have negatively geared properties, to reduce my Taxable income.
Naturally +vely geared would be my first choice as I wont be buying just to reduce my tax.

I don't believe I can do anything else...........except send my wife into the salt mines to generate a high income and then buy property jointly.

Am I missing something?

 

[yc85]

Do you own your business or have a Self managed super fund? One way to do it is to buy property using your super fund. Get all the tax benefits and cause you no higher tax. I know someone who used it to buy warehouse, i'm not 100% certain with residentials.

 

[Trogdor]

Do you own your business or have a Self managed super fund? One way to do it is to buy property using your super fund. Get all the tax benefits and cause you no higher tax. I know someone who used it to buy warehouse, i'm not 100% certain with residentials.

I dont think that is correct. The original poster wants to borrow (hence the negative gearing) which he couldnt do in a super fund.

Perhaps just wait for property to become +ve (and use trapped losses) in a DT or buy at the same time high yielding shares/LPTs within the DT to offset.

That or get comfortable with a hybrid trust (though Im not - but many are).

 

[alexlee]

While I personally plan on using trusts from now on, it's not the worst thing in the world to have everything in your name. A few months back in the interview in API, our Matriarch Jan Somers said that she owned all her properties in their personal names. Sure some people will say that's not tax efficient and opens them to lawsuits, but they're doing well, no?

Though using a trust would save even MORE money than the costs you're incurring now (including losses carried forward), such as CGT and stamp duty savings when you die and pass the properties to your children say. With a trust you can just move the shares in the trustee company to your kids and given them control with no CGT consequences.
Alex

 

[Mry]

I like the Navra concept of purchasing high yield income units in conjunction with rental properties. If you can put those in a basic discretionary trust, the high yield income units would offset the cash loss and taxable loss of a rental property (as long as it is done in the right proportions). You could then distribute the profits from the trust to people on a low income.

 

[Sunfish]

I like the Navra concept of purchasing high yield income units in conjunction with rental properties.

Could you please expand on this a little?

 

[Mry]

Could you please expand on this a little?

I would like to point out that I am not a financial planner, I do not hold a financial license, people should see a financial planner if they intend to do anything and I will not be held responsible if you implement anything I say.

Its quite easy once you grasp it. Basically, anyone buying a standard rental in a developing area (at least around Brisbane) will on average yield 5% of the value of the property and spend roughly 10% of the house's value in expenses per year on servicing the debt in full (if you don't pay a deposit), which means that for a $300,000 house you will have to find $15,000 a year in cash to pay for the holding costs.

To offset those costs, at the same time you invest in a high yield managed fund to produce income to offset the cash outlay. Yes you do have to use extra equity to do this, but you can also set up a margin loan account with the fund if you set it up with the right provider. Lets say you find a fund that returns 20% and margin lend it all up to say $200,000, and after repaying the loan at 8% you have $12,000 left over during the year to pay towards the rental property.

In the end you only have to fund $60 a week, $3,000 a year, out of pocket for this investment set up. You could throw more into the managed fund to eliminate any cash outflow but since you can't technically use it as security to purchase another property, you may want to hold back on it. Plus, the property has its own tax breaks, the managed fund income comes with imputation credits and capital gains which are discounted to help your tax situation substantially. Last of all, managed funds pay quarterly so you may want to use a LOC to fund repayments as you wait for the managed fund to pay out.

I know there are a lot of assumptions here which could be easily attacked, but the underlying strategy is quite attractive.

 

[JIT]

I would like to point out that I am not a financial planner, I do not hold a financial license, people should see a financial planner if they intend to do anything and I will not be held responsible if you implement anything I say.

...

I know there are a lot of assumptions here which could be easily attacked, but the underlying strategy is quite attractive.

Good that you prefaced your post with these comments! - anyway this 'strategy' has been discussed and analysed to death on invested.com.au if anyone is more interested.

 

[Trogdor]

I think this is a very sound strategy, but subject to several points.

Going forwards, in a rising interest rates environment it will be harder to beat the cost of money (hence the margin loan wont serve to magnify +ve much if at all). Also - I'd be very wary of the risks associated with putting all your eggs in one fund - especially one which employs a proprietary trading strategy which also has an inherent "key man" risk. I'd diversify across several different funds managed by larger groups.

 

[redsquash]

Obtaining addtional income is not the problem.
The thrust of my question is what is the best way to purchase a property in my situation.
Super is out as you are not able to borrow against the asset.
A discretionary trust is out as I may never be able to access the losses held in a trust.
A company is out ,as I cant reduce my personal income generarted by the properties to be offset against interest on future properties bought.

I did read something a few hours ago on this site, about chan and taylor accountants who have a Proppterty Investment trust PIT . Supposedly I can deduct interst paymernts from a trust and distibute the capital to beneficieries upon sale ...........but that doesnt seem possible form my knowlege of trusts . This isnt a HDT but I have no details. If it was a hdt then I could undersatnd , how a PIT worked.
does anyone actually know the intricacies of this PIT deed
Alexee, I think you are probably right as to my situation . I certainly cant see an alternative

 

[alexlee]

Looking long term, are you also planning on building a share and bond portfolio as well? That would help offset the income. Also, if you have a long enough horizon, properties DO become positive after a few years.

On the other hand, it's not a cardinal sin or anything to just buy everything in your own name. You might end up paying more in tax, but at that point you'll have shedloads of equity and income, and you probably won't care.
Alex

 

[Melbear]

I wouldn't be ruling a DT out as at some point as has been mentioned you will turn the properties into positive.

Either that, or as discussed above, offset the losses in the trust with some positively geared managed funds - personally I would use Warrants and Options on direct shares to earn the income.

In regards to the PIT deed - there's a massive thread about it if you wanted to have a look but as far as my understanding of it is that it is a HDT but written differently to the other popular one used.

 

[Pat]

Hi,

In your situation I would think that part of your strategy should involve negatively gearing property through Instalment Warrants in a SMSF. If you are a long term property investor and have high income tax then investing this way will prove part or all of the answer. The income tax break comes in the salary sacrificing into your SMSF and being a long term investor the Capital Gain on the sale of property in super is 10% and if you are in pension mode when you divest then there is no tax. You are a bit more limited in that you need 20% deposit each time you want to buy another property in this structure but as I understand them you can access the Equity Growth in your first property to purchase a second property in your fund.

A no-brainer if you want to divest after age 55 and work half of the year while sitting on the beaches of Europe sipping lattes and Heinekins the other half of the year.

 

[alexlee]

Depends on how old you are now. If you're fairly young, you can probably become wealthy enough to semi-retire / retire / whatever way before 55.

Personally, for example, I'm keeping my super contributions to a minimum. Why? I'm NOT locking my money away until I'm 55 when I expect to be wealthy before that.
Alex

 

[Pat]

Good point Alex, the founder of our firm has retired at a young age via property.

But I can't help thinking that our government makes employers pay 9% of salaries into super and they allow employees to choose which Super Fund that goes to. I would prefer that 9% working for me at gearing levels into a property of my choice. As I mentioned gearing property in a SMSF would be part of the answer if they're enforcing saving for when we're wrinkly.

 

[alexlee]

Super is an excellent vehicle for people who otherwise would not save and invest precisely because it's locked away for decades. And let's be honest: most people can't save and wouldn't invest if their life depended on it (which of course, it does). Without it, we would all have to fund more pensions in the future (and have higher inflation now).

A person who is reasonably young, saves, learns to invest and is willing to using gearing will most likely achieve wealth long before the age at which super withdrawals are tax free.

Personally, I'm packaging my salary so that my super contribution is something like 3% of my pay.

While I'd prefer that I be allowed to use the super contribution as I see fit, government policies have to be aimed at the average joe. And we're not. So we figure out ways to get around it.
Alex

 

[JIT]

Hi,

In your situation I would think that part of your strategy should involve negatively gearing property through Instalment Warrants in a SMSF. If you are a long term property investor and have high income tax then investing this way will prove part or all of the answer. The income tax break comes in the salary sacrificing into your SMSF and being a long term investor the Capital Gain on the sale of property in super is 10% and if you are in pension mode when you divest then there is no tax. You are a bit more limited in that you need 20% deposit each time you want to buy another property in this structure but as I understand them you can access the Equity Growth in your first property to purchase a second property in your fund.

A no-brainer if you want to divest after age 55 and work half of the year while sitting on the beaches of Europe sipping lattes and Heinekins the other half of the year.

Pat,

How come you say this above, but in another thread, referring to the same thing, you say this below:

Unfortunately this law is again for the wealthy, call me cynical but I think John and Peter want to pump prime their own exhorbitant super so they have just snuck this one in before they're on the political scrapheap on November the 19th.

The reason is because to self fund an average property of $500,000 with the minimum deposit of 20% you will need SGC contributions on a salary of about $150,000 from an employer plus the net rent from the leasing of the property.

To all the inner city MBA's and other professionals, here is a free kick, the rest can please themselves.

At least competition should drive down the cost that Quantum quote for these warrants

You seem to know a bit more about this sort of product than others here, can you explain it with an example using numbers?

Are you also suggesting HDT's won't be suitable here?

Thanks,

 

[Pat]

Hi,

I do know a bit about the Property Warrants but am learning all the time because they are new and our clients rely on us understanding new tax trends in property investment. I should be able to get down an example soon but some of the details are still sketchy and like all loan products they will suit certain people in certain situations.

I believe that this thread was started by a person on high income who could benefit from the warrants so I don't think that I am being contradictory.

The HDT is alive and well and remains an excellent structure for negatively geared investments. Again, each situation requires differing advice depending on circumstances

 

[JIT]

Hi,

I do know a bit about the Property Warrants but am learning all the time because they are new and our clients rely on us understanding new tax trends in property investment. I should be able to get down an example soon but some of the details are still sketchy and like all loan products they will suit certain people in certain situations.

I believe that this thread was started by a person on high income who could benefit from the warrants so I don't think that I am being contradictory.

The HDT is alive and well and remains an excellent structure for negatively geared investments. Again, each situation requires differing advice depending on circumstances

No you weren't contradictory in that he is on a high income, but we don't know this person's age (along with several other variables), and I think that these will also influence whether or not this product is appropriate.

I think that when we anaylse this sort of structured product in detail we will find a very specific type of investor for whom it is suitable and a 'no-brainer', and for all other (and I suspect this will be the majority) there will be several 'catches' or downsides that may be more prominent.

Look forward to hearing a more detailed example. Let's see if we can nut it out on the forum here! Maybe even start a new thread.

It is certainly new. Quantum is the only one I've come across so far, so it will be interesting to read about the others that come out.

 

[oracle]

I would like to point out that I am not a financial planner, I do not hold a financial license, people should see a financial planner if they intend to do anything and I will not be held responsible if you implement anything I say.

Its quite easy once you grasp it. Basically, anyone buying a standard rental in a developing area (at least around Brisbane) will on average yield 5% of the value of the property and spend roughly 10% of the house's value in expenses per year on servicing the debt in full (if you don't pay a deposit), which means that for a $300,000 house you will have to find $15,000 a year in cash to pay for the holding costs.

To offset those costs, at the same time you invest in a high yield managed fund to produce income to offset the cash outlay. Yes you do have to use extra equity to do this, but you can also set up a margin loan account with the fund if you set it up with the right provider. Lets say you find a fund that returns 20% and margin lend it all up to say $200,000, and after repaying the loan at 8% you have $12,000 left over during the year to pay towards the rental property.

In the end you only have to fund $60 a week, $3,000 a year, out of pocket for this investment set up. You could throw more into the managed fund to eliminate any cash outflow but since you can't technically use it as security to purchase another property, you may want to hold back on it. Plus, the property has its own tax breaks, the managed fund income comes with imputation credits and capital gains which are discounted to help your tax situation substantially. Last of all, managed funds pay quarterly so you may want to use a LOC to fund repayments as you wait for the managed fund to pay out.

I know there are a lot of assumptions here which could be easily attacked, but the underlying strategy is quite attractive.

Mry,

I totally agree with you. The strategy is very attractive. But I believe that in doing so you should also be prepared for the worst. Let's be honest 20% return is unrealistic to continue forever. I have nothing against Navra fund or any other high yield returing funds. What I would like to see is the kind of returns from these funds in the bad times. I am sure they would continue to charge their fees inspite of low performance. You could be caught out in such a scenario where you have taken so much debt (margin loans, draw down equity etc) and not enough income to repay.

I am not trying to be pessimistic. I myself am fairly new to investments and have only seen a bull market. Which always makes be feel inexperienced in making sound investment decisions. Because I don't know what is the worst case scenario that I need to be prepared for??

Just my 2 cents

Regards,
Oracle.