How to structure a negatively geared property

[Blueberry]

After the structure my accountant suggested got trashed, I thought I would d ask how everybody else structures their negatively geared properties?

Plan at this stage is to buy and hold capital growth properties about 8-10 years (barring expected high growth after or low growth prior) *or* to buy, subdivide and sell with plans after a year or two.

After I got back to the accountant on the issues with the other structures, he also suggested the usual suspects. Now I have to make a decision and none are ideal.

Holding property in higher income holders name (hubby) (for a 2-3 properties max) . Gets tax deductions, taxed higher when selling. Asset protection would be limited to keeping the property highly leveraged, which was the plan anyway. We do have our PPOR in our names though. Would it be worth changing it to my name only in this case?

Hold in company structure. Can negatively gear. Shares and income can be seized. Director can be sued (would we want me as director?) . Would provide a little protection. Can't access CGT discount. Thus is his recommendation if not going with previously outlined one.

The usual discretionary trust with corporate trustee. Can't negatively gear but can quarantine them. May go positive in future, maybe wasting it as only slightly positive income would have to be offset? Maybe better if holding property for only a year or two?

Unit trust - he didn't mention this

Really want to consult a great property accountant but hubby would say no. He wants to use his.
So what does everyone else do?

Thanks

 

[Shahin_Afarin]

What structure did your accountant suggest and why did it get trashed?

I don't think you will get the correct answer from 'what everyone does'. Perhaps align yourself with a good accountant.

I also can't see where in the above equation you have factored for land tax? Have you thought about this?

Regards

Shahin

 

[wylie]

Go and see a really good "whoever is needed" and tell your husband why.

 

[Blueberry]

What structure did your accountant suggest and why did it get trashed?

I don't think you will get the correct answer from 'what everyone does'. Perhaps align yourself with a good accountant.

I also can't see where in the above equation you have factored for land tax? Have you thought about this?

Regards

Shahin

http://somersoft.com/forums/showthread.php?t=86582

I was thinking property bought in NSW was more likely to be bought under hubby's name, but that is as far as my thoughts on land tax have gone to be honest. Our first property purchase is not in NSW, but our second one may be (tossing up between NSW and QLD).

 

[Blueberry]

Go and see a really good "whoever is needed" and tell your husband why.

I did that prior to seeing his accountant. He thinks to buy in his name and I'm too paranoid about asset protection. However, he is also the one that resisted this property thing as we may lose money. Infuriating to say the least.

 

[Aaron_C]

Blueberry - you are putting the cart before the horse. Is this your first IP? Why not keep things simple for starters? There are many advantages for personal name due to negative gearing, ease of accounting/finance etc.

You can never have the whole asset protection + negative gearing unless you proceed down the hybrid trust route and even then it is difficult to finance. If you become so paranoid about asset protection you will never invest and be worse off anyway.

 

[The Y-man]

Blueberry,

Does either of you engage in activity that is potentially risky to your assets?

eg. Self employed (without adequate insurance), own business, etc?

If you and/or hubby are "off the shelf" variety employees, and you have all you other insurance (home, life, TPD) then my understanding is that there is relatively little risk in term of asset protection.

Unless you are foreseeing a martial break up etc, which is messy no matter how you structure it.

You can own a property jointly as tenants in common with varying % ownership (eg a 20-80 split, or even 99-1 split)

There may be tax implications and costs in changing ownership of your PPOR to yourself only.

The Y-man

 

[wylie]

Does either of you engage in activity that is potentially risky to your assets?

From the previous thread, I assumed one of you (hubby) may be in a job that is at high risk. If not, then, as they say... "just do it".

If he is in a high risk job, then surely he understands the need to protect assets without getting paranoid about it. Give him a good slap and buy something .

 

[HotRod]

But it's a lot easier taking high risks with more money than less risk with your own money.

 

[vaughan]

Remember that negative gearing is all about writing off losses associated with the IP against other income. If the IP is in hubby's name then 100% of the loss is against their income. If joint ownership then the negative gearing is 50% each (or whatever split is agreed to in the ownership documents).

If joint ownership and, say, you are big earner and hubby is at home, then hubby's 50% of the loss cannot be negatively geared against anything.

 

[Blueberry]

From the previous thread, I assumed one of you (hubby) may be in a job that is at high risk. If not, then, as they say... "just do it".

If he is in a high risk job, then surely he understands the need to protect assets without getting paranoid about it. Give him a good slap and buy something .

Lol. Love to.

In fairness, he is in the classic professional group in need of asset protection (Dr, dentist, lawyer type), but he in an employee. He also has liability insurance.

 

[Blueberry]

I am leaning towards putting in his name at the moment and highly gearing. Not sure whether should transfer PPOR into my name only to reduce risk. Or whether it would

 

[boxdog]

Hey guys

I'm in a similar situation to Blueberry (circumstances, strategy, goals, etc) Except I have a de facto partner, not a hubby Sorry if it seems I'm rickrolling the thread but hopefully it might add some value?

About to invest in capital-growth intensive property and have been sweating about the pros and cons of going with a trust to do so for asset protection.

Neither of us are in a high risk job presently but future we will hopefully have our own businesses. She's a qualified massage therapist so it's realistic to assume one day she will run a practise as a company (with sufficient insurances of course). I've always wanted to start a business but just want to focus on property investing first.

I use Chan and Naylor for mortgage broking currently and they are recommending their Property Investors Trust (PIT) as a way to get the benefits of trusts PLUS the ability to negatively gear. It's expensive though, they want $3600 to set up a hybrid trust with this dead and a company as a trustee. Plus $1200-2000 per annum for tax accountancy. I'm still in 2 minds despite partially filling in the paperwork.

I earn substantially more than she does so for tax reasons I am presuming its better for me to own property anticipated to be negatively geared and for her to own the cashflow positive properties IF we didn't go with a trust.

I'm not terribly concerned about asset protection with adequate insurance and our strategy being nothing more than simple subdivision and reno at this stage - if we were developing for instance it would be a diff story!

What would YOU do in this situation?

 

[boxdog]

Not sure whether should transfer PPOR into my name only to reduce risk. Or whether it would

IANAL but I suspect that if he was to be sued, the courts would ascertain that since you are married your assets count as joint assets and thus your PPR wouldn't be protected..

 

[Aaron_C]

IANAL but I suspect that if he was to be sued, the courts would ascertain that since you are married your assets count as joint assets and thus your PPR wouldn't be protected..

That's not true. However, if you transferred the property just before you went bankrupt to your spouse then the court can unwind that transaction.

 

[boxdog]

That's not true. However, if you transferred the property just before you went bankrupt to your spouse then the court can unwind that transaction.

Cool, learn something new everyday! Thanks!

 

[nhg]

That's not true. However, if you transferred the property just before you went bankrupt to your spouse then the court can unwind that transaction.

From memory they can go back 3 years.

 

[Peter_Tersteeg]

I'd be looking at this from an asset protection point of view and not get too worried about the gearing aspect. If there is a real need for asset protection then you go with a discressionary trust and a corporate trustee. You won't get any immediate gearing benefits though.

The problem with trying to optimise negative gearing is that circumstances change over time. You can opimise negative gearing by putting the assets in the name of the highest income earner, but when the property becomes positive geared through rental increases, you'll end up paying more tax which could potentially be more costly in the long run.

A wise accountant once said, start with things looking like how you want them to end up. If you want your portfolio to be cashflow positive in the long run, structure for that outcome from the begining. If this property is going to be a capital growth deal an you always expect it to be negative geared, then that's how you make it look.

Structure the property to its part in your overall plan. Tax issues are secondary to this. Chances are you'll never the a 100% optimal solution.

 

[Aaron_C]

From memory they can go back 3 years.

You can go back as far as they need too. See Cummins where a transfer to his wife done 19 years ago was unwound because the Court found that at that time he had in contemplation tax avoidance.

 

[Terry_w]

Cummins, from memory, was a case where a constructive trust was held. ie they didn't go back under the bankruptcy act, but the wife was taken to be owning half the house for herself and the other half for her husband as trustee for him - actually I think 30% for him.

Also separately, under the bankruptcy act transactions to defeat creditors can be voided indefinitely now.