Purchasing renovation project: Trust or In my wifes name?

[NickZed]

Ladies and Gents,

I am just looking for some feedback or opinions if possible...

I am in the process of purchasing a house that I am going to renovate (with the help of tradesmen) and then sell - with a turn around time 4-6 months. Hopefully with some capital gains.

Background information: I am on the top marginal tax rate, whilst my wife is on a lower tax bracket.

The question that I have is with regards to the ownership structure related to this transaction.

I am contemplating purchasing the house in the name of a Trust with a Company as the Trustee.

The benefits of doing this are (as I see it):-

1) Asset protection: If a tradesman were to injure himself during the renovations and decided to sue for some form of damages the asset would be protected and I would not personally be liable.

2) Distribution of income: Once the capital gain had been realized, income could then be distributed to a related party (such as my wife) or to the company and lower amounts of tax paid.

The disadvantages of using a trust / company are as follows:-

1) Costs associated with setting the structure up (about $1600).

2) If per chance, I decided to hold the property (instead of selling it) then the property could not be negatively geared.

The other way that I am contemplating purchasing the property is solely in my wife's name (with me as guarantor).

Personally, I am leaning to towards the trust structure...

Some questions for you all:-
1) Are there any other glaring benefits / disadvantages associated with the Trust/company structure that I am missing?
2) Are there any other structures that would be me worth contemplating?

Any help, suggestions or opinions would be much appreciated.

Regards
Nick

PS This is the first time that I have contemplated using a trust in a property transaction. I am seeking financial advice from an accountant, however, I thought that some advice from seasoned property investors such as yourselves would also be valuable.

 

[alexlee]

1) Asset protection: If a tradesman were to injure himself during the renovations and decided to sue for some form of damages the asset would be protected and I would not personally be liable.

The property itself would still be at risk, but your personal assets shouldn't be. But wouldn't you have insurance for this? You'd probably have to put in a personal guarantee on the mortgage, though.

2) Distribution of income: Once the capital gain had been realized, income could then be distributed to a related party (such as my wife) or to the company and lower amounts of tax paid.

Your wife or an associated company can receive distributions if they belong to a class of beneficiaries, not just because they're related parties. Remember the 50% CG discount wouldn't apply so your taxable gain will be the full amount of the profit.

2) If per chance, I decided to hold the property (instead of selling it) then the property could not be negatively geared.

Not exactly. It CAN be negatively geared, you just have to carry forward the losses within the trust until the trust has net taxable income to offset it.

The other way that I am contemplating purchasing the property is solely in my wife's name (with me as guarantor).

Possible, and all income would be taxable in your wife's name.

Personally, I am leaning to towards the trust structure...

Depends on how much income your wife makes and how much profit you expect to clear from the property. Personal rate is still 30% up to 80k for 10/11. Will your wife's income including the gains from the property be higher than 80k? The trust for income streaming purposes is only useful if your wife's combined income is over 80k, in which case it makes sense to distribute the excess to a company. However, keep in mind the new rules (not sure if it actually is law yet) that says you have to pay out distributions to companies from trusts in cash.

The other question is, once the money is in the company, how do you plan to get it out?

 

[NickZed]

thanks alexlee,
your answers are very useful and have made me realise that a bit more reading is in order.
I have just downloaded the "trust Magic" e-book and will have a read before reverting with some questions.

Regards
Nick

 

[Terryw]

Another potential issue is land tax if owned by a trust - especially in NSW. This won't apply if you sell before 1 Jan.

I would be inclined just to buy in your wife's name since it is a short term thing.

But things change and while you may think of selling now you may end up keeping it later.