Trusts and Structuring advice for my situation

[Nixba]

Hi guys,

Seasons greetings to you all.

I'm still relatively new to the IP game, however I am hoping you can help me with my situation.

In terms of background context, I'm 23, and purchased my first IP in August this year (2 bedroom unit in St Marys, NSW. Thread here: http://somersoft.com/forums/showthread.php?t=89478 ). I have since had the property revalued at $240,000 and have also saved an extra $25,000 in cash for the next purchase(s). I am planning to buy another 3-4 properties next yr.

The questions I have for the forum:


* If and when should I start looking at trust structures? Do I wait until I hit the serviceability ceiling in my own name, or do I look at setting up these structures early for the long term given I am looking at accumulating the portfolio quickly over the next 5 years.

* What are the implications of using trust structures on borrowing capacity?

* Are there any books that people recommend reading on entry level property investment accounting / trust structures? I've keen to keep educating myself but really need to start from scratch on this stuff.

Any thoughts or feedback would be greatly appreciated.

Kind Regards,
Nixba.

 

[Terry_w]

Hi guys,

Seasons greetings to you all.

I'm still relatively new to the IP game, however I am hoping you can help me with my situation.

In terms of background context, I'm 23, and purchased my first IP in August this year (2 bedroom unit in St Marys, NSW. Thread here: http://somersoft.com/forums/showthread.php?t=89478 ). I have since had the property revalued at $240,000 and have also saved an extra $25,000 in cash for the next purchase(s). I am planning to buy another 3-4 properties next yr. Salary is $150k p/a.

The questions I have for the forum:


* If and when should I start looking at trust structures? Do I wait until I hit the serviceability ceiling in my own name, or do I look at setting up these structures early for the long term given I am looking at accumulating the portfolio quickly over the next 5 years.

* What are the implications of using trust structures on borrowing capacity?

* Are there any books that people recommend reading on entry level property investment accounting / trust structures? I've keen to keep educating myself but really need to start from scratch on this stuff.

Any thoughts or feedback would be greatly appreciated.

Kind Regards,
Nixba.

1. Start researching now as it will take about 5 years to understand trusts! The trust doesn't have to be the owner of property but can be utilised in other ways.

2. Trusts don't improve borrowing capacity

3. Try "Trust Magic" and "The Trust Structure Guide" (if you are rich)

 

[Peter_Tersteeg]

Purchasing a property via a trust doesn't help you overcome a serviceability issue. In fact, as trusts generally can't negatively gear, your serviceability is usually reduced by purchasing through a trust.

The primary reasons for purchasing through a trust are for asset protection and tax flexibility.

Google search "Trust Magic" by Dale Gatherum-Goss for an easy to read manual about trusts.

 

[jmillar]

Purchasing a property via a trust doesn't help you overcome a serviceability issue. In fact, as trusts generally can't negatively gear, your serviceability is usually reduced by purchasing through a trust.

Peter,

If looking at purchasing a neutral or positively geared property, is purchasing in a trust or a personal name the same, in terms of serviceability and savings needed etc?

Cheers

 

[Terry_w]

Peter,

If looking at purchasing a neutral or positively geared property, is purchasing in a trust or a personal name the same, in terms of serviceability and savings needed etc?

Cheers

Trusts can negative gear, but what I think PT means is that with loans in your own name for serviceability the tax savings can be taken into account. However for trusts with no other income there will be no tax savings so this can effect serviceability.

Even with a positive geared property this could affect serviceability to a degree.

 

[Peter_Tersteeg]

Terry's correct. It would have to be a very, very cash-flow positive property for a trust not to reduce your affordability. I can think of a few set of circumstances where a trust can increase your affordability, but it's a very limited an narrow set of circumstances.

If you're thinking of investing through a trust, the reasons should be for asset protection and tax flexibility, not for affordability. You should also be aware that the tax flexibility is something that tends to occur when the portfolio is well and truly in the positive cash-flow space, it's rarely an immediate benefit.

 

[Mush]

Surely investment using a unit trust with multiple partners contributing would increase affordability?

 

[Terry_w]

The way to use a trust to increase serviceability is to increase or change the person who or number of persons who give the personal guarantees. If it is just Mr X on his own and Mr X as director or the corporate trustee then serviceability will be almost the same - exactly the same disregarding negative gearing adbacks.

You could replace Mr X with Mrs X and/or Mr Y and serviceability would be based on this person's income and debts and guarantees.

 

[baby blue eyes]

If you are buying in NSW then you will be paying land tax immediately on IPs in trusts. I prefer to use up the land tax threshold first and then look to using trusts.

 

[Terry_w]

If you are buying in NSW then you will be paying land tax immediately on IPs in trusts. I prefer to use up the land tax threshold first and then look to using trusts.

This is the case for inter vivos discretionary trusts, but not so for fixed trusts, SMSFs, Testamentary discretionary trusts (for 2 years post death), special disability trusts, custodian/bare trust (in certain situations) etc.

 

[baby blue eyes]

Thx Terry,

Assumption I made was that smsf, testamentary, custodian/bare trusts and special disability trusts were not being considered by the op.

 

[coastymike]

Remember as terry said a fixed unit trust with an individual holding the units means the unitholder will receive the threshold. The fixed unit trust is disregarded and the unitholder determines who pays land tax. If a discretionary trust holds the units then the dt is assessed. This is for NSW of course.