Is trust more cost effective for this simple scenario?

[mixedup]

In terms of which name (my name versus trust) to put an Investment Property in, what would be the answer (or just main determining factors) in the the following scenario. Basically was just after the key factors re how things work here, so there I could go off an spreadsheet if need be. So:

• Property Value: $500k
• Overall plan: Buy and Hold (not sell)
• Retirement Details: Assume need to work for another 10 years, then retire.
• Work/Income: Assume $80k income during 10 years
• Assume no personal $$ put into the sale
• Rental Property overall is (at least in first year) running say at $5k loss per year (prior to tax benefit)
• Just look at financial

Don't include in discussion/comparison (i.e. keeping things simple)

• * asset protection
• * land tax

PS. so I guess I'm not sure how to do the comparison mainly due to I don't know how to work out data from the trust option (a) during working period how much negative gearing I could get if at all with a trust, (b) what financial benefits if any after retiring if it's in a trust compared to my name, (c) cost over the period maintaining paperwork for a trust. Assuming it would be a hybrid trust in this case being the best?

PSS. Whilst wanting to avoid asset protection in this scenario, I guess in the Buy and Hold there would be the "passing it on to children" say 30 years down the track. Not sure overall if a trust would help avoid cost, and if yes, whether this would really change anything once discounting back to todays dollars.?

 

[Terry_w]

Land tax is the first thing I consider when people ask me whether to buy in a trust. e.g. $400,000 land component property in NSW would be $6,400 in land tax every year if owned in a trust. If the person doesn't own other property, other than the main residence, in NSW then the land tax would be nil if purchased in their own name. Huge difference in costs

Negative gearing is another major thing. If there is a taxable loss in a trust then this cannot be used to decrease your personal income. Where if it was in your name then it could and thereby save you tax. e.g. $100,000 income with a $10,000 taxable loss means you may save around $3700 in tax in the first year. This will reduce over time as rents increase, but may take around 10 years before you are positive taxable income.

So using a trust in the above examples would cost you around $10k pa extra.

Then there is set up costs and running costs.

 

[mixedup]

thanks Terry,

Would it be roughly true to say then overall, in the case of negatively geared property, that financially typically better to keep names of property in your own names whilst there is a Land Tax & Negative Gearing benefit. But at some number of properties this may change over to being better in a trust?

 

[Terry_w]

thanks Terry,

Would it be roughly true to say then overall, in the case of negatively geared property, that financially typically better to keep names of property in your own names whilst there is a Land Tax & Negative Gearing benefit. But at some number of properties this may change over to being better in a trust?

Hard to generalise.

First question I would ask is
1. Which state is the property located in?

and then

2. What is the cashflow of the property.

If the property is in NSW and the person is self employed and has already used up their land tax threshold then I would investigate a discretionary trust - or unit trust with units owned by a DT. Also consider spouse name.

If no property owned and will be buying in NSW then I would point out the land tax issues and take it from there. (interesting how many of the people come and see me and have already set up a DT and some have even used a DT to purchase, but they don't know about land tax, or have not considered it).

 

[mixedup]

State is QLD in this case. Would stick with assumption properties are roughly -$5000/year before any tax benefit (i.e. a $5k loss per year)

 

[Terry_w]

A trust would get a land tax threshold of $350,000 in QLD.

 

[mixedup]

thanks Terry - so overall (and extremely roughly) you may be (for negative geared property) best to:
a) put first few IPs in your own name (then when tax advantage/personal land tax thresholds are crossed)
b) put next ones in first trust, then when this crosses land tax threshold
c) put next ones in 2nd trust etc

 

[Terry_w]

thanks Terry - so overall (and extremely roughly) you may be (for negative geared property) best to:
a) put first few IPs in your own name (then when tax advantage/personal land tax thresholds are crossed)
b) put next ones in first trust, then when this crosses land tax threshold
c) put next ones in 2nd trust etc

Depends how you define 'best'. You are looking at short term financial benefits only here. Many other things to consider such as asset protection, income tax after a few years, estate planning etc.

 

[coastymike]

Yes that is best from a land tax perspective in nsw but not the best from many other perspectives such as estate planning, retirement planning, etc

 

[Paul@PFI]

What type of trust is being discussed ?

Fixed, Hybrid or Discretionary ?

 

[mixedup]

just in terms of estate planning financial benefits, if the expectation is that you have say

1. another 12-15 years of taxable income, and
2. passing on property to children you estimate is say 25 years off,

then is it not a reasonable assumption that the $ benefits in having the property in your name over the next 15 years (with tax benefits) would outweigh the $ benefits in passing onto children in 25 years without having to sell/buy with stamp duty etc?

 

[geoffw]

Another matter is capital gains tax. If a negative property is held in the name of the higher income earner to minimise tax, then if the property is sold at a profit, then that profi gets taxed in the name if the higher income earner. I'm in a similar situation now- I'm up for about $80k tax for a property which was always positively geared, so I cop the tax both on income and sale. I didn't know about trusts then! A property which I bought later in a trust and sold for a good profit had less tax due as the profit was able to be distributed.

 

[mixedup]

but then, assuming you don't get negative gearing benefits in a trust (?), the capital gains tax impact in 25 years time, wouldn't be too much speaking in todays dollars right? So the immediate real negative gearing gains over the first say 15 years you would think would outweight them? (or am I missing something)

 

[geoffw]

Yes, you're right. It's up to you to work out what best in your own circumstances. It would depend too just how much it's negatively geared. Put it all down in a spreadsheet, work out most likely scenarios, change a few things- like expected growth and time held.

Personally I hadn't intended selling but circumstances change. We held one property just three years and the other twelve.

Also factor in growth in rent. At some stage it should become positive- carried forward losses in a trust can offset future gains. Or you may have a business or a positive property in the same trust.

 

[Terry_w]

Another strategy is to just buy in own name and set up a testamentary trust in your will and have the property held in this post death discretionary trust (people are dying to get these set up!). There are extra tax benefits and asset protection benefits. No tax or stamp duty on transfer upon your death either.

 

[mixedup]

ok Terry - so this would be a much more straight forward way to (a) get the negative gearing benefits for the next 15 years, but still have (b) a way to pass onto children in a manner that doesn't trigger capital gains tax/stamp duty etc then? Do I understand things correctly?

 

[Terry_w]

ok Terry - so this would be a much more straight forward way to (a) get the negative gearing benefits for the next 15 years, but still have (b) a way to pass onto children in a manner that doesn't trigger capital gains tax/stamp duty etc then? Do I understand things correctly?

Yes it is one way - more straight forward I guess, but you have to die for them to take control.

 

[mixedup]

ok Terry But like, overall, as a really rough rule of thumb, if you say were single/working, still had 15 years of income, and negatively geared property it would "generally" be the case for the first couple of property (before land tax impacts) that buying in your name would be financially better (ignore asset protection etc) than use of a trust right? i.e. tax benefits upfront should outweigh any capital gains issues on sale in 20+ years time noting time value of money...

 

[Terry_w]

ok Terry But like, overall, as a really rough rule of thumb, if you say were single/working, still had 15 years of income, and negatively geared property it would "generally" be the case for the first couple of property (before land tax impacts) that buying in your name would be financially better (ignore asset protection etc) than use of a trust right? i.e. tax benefits upfront should outweigh any capital gains issues on sale in 20+ years time noting time value of money...

I had a client who purchase in WA before the boom a few years ago. He was on the top rate of tax. Wife was a stay at home mum. I advised him to consider a trust. He purchased in his own name to get negative gearing benefits.

I forget the figures, but something like this
$200,000 purchase price
$400,000 sale price (in just over a year I think - double overnight sort of thing).

$200k capital gain
$100,000 taxable income after 50% discount.

He paid $48,000 extra tax on the capital gain. Wife still earned $0.

If it was held in a trust the $100,000 could have gone to the wife and she may have paid $30,000. or so

Could have bought it in the wife's name solely too.

So it is hard to generalise.

 

[mixedup]

but if he had sold in 15 years time, then the $48k would only be ~$23k in today dollars (@4%) correct? Also at that stage if they had both retired it wouldn't make a difference either way as the capital gains would apply against their income for that year correct?