Tenants in Common???

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From: Glenn M


I was just wondering the best structure to purchases an Investment Property with my wife. I believe that a Tenants in Common structure would be the most advantageous structure as in 2-3 years from now, we are looking at having children. At this time, she won't be earning any income, so our % ownerships can then change to 99% me and 1% her. We just don't want to miss out on some huge tax deductions that would otherwise go to waste. Can anyone help me as to whether this is the best structure? Using a Tenants in Common vehicle, can the ownership % be changed at any time?

By the way, who creates a Tenants in Common structure...an accountant or the solicitors? How much does this usually cost to create?

Hope someone can help me soon as we are looking at purchasing within the next two weeks.


GlennM.
 
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Reply: 1
From: Owen .


You wrote - "At this time, she won't be earning any income, so our % ownerships can then change to 99% me and 1% her".

When you purchase a property Tenants in Common the ratio set at the time of purchase stays that way until you sell it. If you are planning on a family in years to come you may want to consider doing a 99/1% ratio from word go.



Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 2
From: Duncan M


Hi Glenn,

If you intended on purchasing additional Investment Properties then other options come up which would enable you to skew the loss towards the higher income earner irregardless of the legal ownership that exists.

Check the Rental Property Guide that the Tax Office publishes and read up on the example family "The D'Souzas".

Regards,

Duncan.
 
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Reply: 2.1
From: Owen .


Good example Duncan.

So getting this straight in my own mind. The income split the D'Souzas agreed to in their partnership deal only applies to the income they receive by running their rental business. So 75% of the income (rent) would be added to Mrs D's other income (job) and 25% added to Mr D's. Any costs of tax deductions would then be claimed in an equal 50/50 split to these total income amounts at tax return time. Is that right?

I guess the benefit of this is the partnership agreement could be rewritten anytime to change their business income entitlement percentages depending on the changing circumstances with their jobs to maximise the deductions.

In Glens case, the partnership could be split 99/1 in Glens favour as the highest earner, therefore ensuring the greatest tax benefits and then when the IP is earning an income and Mrs Glen is at home being Mum and not earning, the partnership ratio can be changed to give her a higher proportion of the income, therefore reducing the tax paid.

How is that?


Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 2.1.1
From: Duncan M


>So getting this straight in my
>own mind. The income split the
>D'Souzas agreed to in their
>partnership deal only applies
>to the income they receive by
>running their rental business.
>So 75% of the income (rent)
>would be added to Mrs D's
>other income (job) and 25%
>added to Mr D's. Any costs of
>tax deductions would then be
>claimed in an equal 50/50
>split to these total income
>amounts at tax return time. Is
>that right?

Not quite, the nett profit OR loss is applied in the percentages agreed to in the partnership agreement.

Essentially, each partner has a single figure added to their personal returns; the nett profit or loss from the parternship. The partnership is a registered entity and files its own tax return as well.

Regards,

Duncan.
 
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Reply: 2.1.1.1
From: Anonymous


Hi Glen,

The 99%/1% split might now be beneficial in the short term as your partner doesn't have an income, but when the time to sell the property, the capital gains is added to your income and taxed higher as well.

Other disadvantages are as follows:
The ratio can not be changed unless you sell it to your partner and this will incur another stamp duty. For example To make it 50%/50% you need to sell 49% to your partner.

Your partner might not feel good as she only owns 1% of the property.

Duncan,
Where can I get Rental Property Guide by ATO, is it available in the net.

Thanks,

John
 
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Reply: 2.1.1.2
From: Owen .


OK, if the nett income is split and added to the individuals 'other' income, is this then taxed again?

I thought partnerships were 'not' separate entities as the income produced is passed through to the partners in the appropriate percentages and therefore the partnership didn't fill out a tax return like a company? I'm probably wrong on this bit though.

Lastly, if the partnership does fill out a tax return and the income and expenditure are calculated to give a nett income or loss, even though the IP is in the partners names, does this mean the partners cannot make any tax refund/depreciation type claims on their individual tax returns or is this applied to the partnership entity?

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 3
From: Daphne Sally


I think the capital gains tax point is a good one - what are your long term plans for the property? If you plan to keep it then cgt probably isn't such a big issue. Have you thought about what will happen if your plans change and you become Mr Mum for some reason? Apart from that, if you're the Glenn M I think you are, then you are lucky to have such a cute sister. Who is looking forward to becoming an aunty in 2-3 years!
 
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Reply: 3.1
From: Glenn M


Thank-You for all of your replies, they certainly have helped me a lot.

Yes Daphne Sally, I do have a cute sister.


GlennM.
 
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Reply: 4
From: Steve Piggott


Have you considered a family/unit discretional trust.... under $300 to set up.
Buy the IP in the trust .... and you know what... some legislation exists that allows certain flexability in a gifting arrangement whereby the IP can be gifted to a member of the trust.... then sell it if you must without CGT.(because its your PPR)
Another way would be to setup a company.
Buy the IP in the Company... if you decide you no longer want it... resign from Company and appoint new directors/owners. Also gets rid of the stamp duty to the purchaser.
Whatever you do seek professional advice.
Most people dont....thats why most people make grave mistakes.
Tennants in common is a great strategy for asset protection when you purchase with a corporate structure. Two companies as the tennants in common could be very strategic.
Happy Investing
Neb:)
 
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Reply: 5
From: Dale Gatherum-Goss


Hi

A lot will depend upon your long term strategies. What are you looking at achieving from investing - long term?

The reason I say this is that things change. The current negative income is great if you have a large income and your wife none and you invest with the ownership in your name. But, long term, the property is likely to produce a positive income and then this ownership does not work. Additionally, I often see people's income turn around where the previously high income earner now earns the low income for whatever reason.

Please consider your motives and develop a long term strategy that allows you to be flexible.

As for who establishes such a structure, it is normally your solicitor who will advise you on the implications of each possibility at the same time.

I hope that this helps

Dale
 
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Reply: 2.2
From: Dale Gatherum-Goss


Hi Duncan

I would be wary of using the D'Souza example as it is has a couple of "particular" issues that do not apply to most investors.

The primary one is that the D'Souza's have a large portfolio of property and are obviously conducting a business.

The other issue is that once a property is bought, the title determines who is the owner and then the income is earned by the "partners" in the same proportion.

I remember we discussed this last issue in a previous forum discussion and so it may be worthwhile also doing a search of the archives.

Have fun

Dale
 
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Reply: 2.1.2
From: Dale Gatherum-Goss


Hi Owen

Actually, rewriting the partnership agreement may in fact have a terrible impact for CGT purposes and possibly stamp duty purposes.

Be careful

Dale
 
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Reply: 2.1.1.2.2
From: Dale Gatherum-Goss


Hi

A partnership lodges it's own tax return, but, does not pay tax at all. The income is indeed split between the partners in equal proportions unless there is a partnership agreement stating otherwise.

For example, the P'ship earns $20,000 in rent and pays out $16,000 in expenses. This leaves a profit of $4,000. This is then split between the partners who declare the $2,000 each in their own income tax return and pay tax on that $2,000 accordingly.

The profit is taxed only once.

I hope that this helps

Dale
 
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