How best to structure investment property partnership and finances?

[dextaengland]

Hi Everyone,
I?m seeking some advice on how best to structure a partnership with a friend of mine ? our intent is to buy, renovate and subdivide a property with my family and I living in the property and me doing the bulk of the renos over 12 months (to avoid capital gains tax). We would like to do this several times over the next five years or so.

Due to a failed business a few years back I have no deposit and bad credit whereas my friend has a deposit and good credit. We?re both professionally employed (I?m on wages, he owns his own business with his wife) and both have respectable incomes (though I?ve been paying off the failed business, thus no deposit). My friend is happy to cover the deposit however it?s how to structure things from there that I?m keen to get some advice on.

My initial thoughts were that my friend could purchase the property outright and I would then pay minimal rent on the property (minimal to negatively gear and increase the tax benefits for my friend). I would do and pay for the bulk of the renos (have trade skills), contribute to the subdivision costs and then repay any remaining debt to my friend when we sell the property.

My friend suggested that we might be better off registering a business and formalising a joint venture but neither of us know enough about that to understand the pros and cons.

Any and all advice on this would be very gratefully received.

Thanks,
Warren

 

[Peter_Tersteeg]

I think there's going to be two sets of advice. One from the legal/tax side a second from the lending point of view.

Most people I see doing this sort of thing do it via a trust of some description. Often it's a unit trust as the ownership interests are clearly defined, but you can make it work with a discressionary trust as well. A discressionary trust might work in this case because you're not bringing a deposit to the party. This would allow the two of you to distribute profits based on a variable contribution rather than a set percentage. This also leaves you open to conflict which can be a real problem.

From the lending point of view, with bad credit and no deposit you've got little to no chance of getting finance. Also if you appear on any loan application, then it impacts the odds that either of you will be able to obtain finance. My recommendation from a finance perspective would be that you simply don't be on any loan application at all.

Of course anyone will tell you that this leaves your friend with all the responsibility and only half the ownership and benefit - not a good arrangement.

Honestly from your friends point of view, given your bad credit and lack of a deposit, you're probably more a liability than an asset. Your friend could buy the property and employ you as a consultant.

 

[dextaengland]

Hi Peter and thanks for the speedy input. I'm aware of the liability issues in your last paragraph thus my suggestion of keeping me off the loan documents.

My way of offsetting this (albeit not by a $ value) was for me to be the one doing the renos. I've experience doing this so am more than capable. Put bluntly, what I lack in initial finance I make up for in hard graft.

Cheers again.

 

[westminster]

I think you will need to go see an accountant about this as it's going to be hard to set up to safe guard you both.

Issues that I see:
- you thinking you can live in it to not pay CGT. Not possible if this is a trust and/or you aren't on the loan. If you are on the loan and own it in your name 50% THEN you may qualify for CGT exemption for your half
- CGT vs Income tax vs company tax - the way you set this up will determine which one is applicable
- value of cash vs work. How to determine the $ value of your work. This may be simple or complicated.
- how to split the profit
- how to do it again

 

[Terry_w]

There would be no tax exemption if undertaking this in a business like manner, even if you are living in it.

If you buy in your name you may be able to get the CGT free main residencce status - assuming not a business. But you may not qualify for finance - or suitable finance. If you buy in his name and he doens't live there then no CGT exemption.

Registering a business won't change anything as a busines is not a legal entity. You could purchase in a trust or a company but then non main residence exemption and possibly land tax issues.