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Buying Investment Property in a Trust

Carlie Basham Posted on 04 Sep 2024

Buying Investment Property in a Trust

Hey there! At JKL Real Estate, we know that navigating the world of property investment can be a bit overwhelming, especially when it comes to choosing the right ownership structure. More and more Australian property investors are turning to trusts, and we’re here to help you understand why this might be a great option for you.

Why Trusts are Gaining Popularity

Trusts are becoming a go-to choice for many property investors because of the flexibility and potential tax benefits they offer. However, like any decision, choosing the right ownership structure comes with its own set of pros and cons.

Key Considerations

Before making any decisions, it's important to ask yourself a few key questions:

  • Why are you buying the property?
  • What is the purpose of the property?
  • How long do you plan to hold the property?
  • What are the estimated cash flows?

These answers will help you and your accountant understand your long-term goals and decide if a trust is the best fit for your investment property.

What is a Trust?

In simple terms, a trust is an ownership structure where a trustee manages the property on behalf of the trust's beneficiaries. This means that the legal owner (the trustee) is not necessarily the person who benefits from the property.

How Does a Trust Work?

A trust is established by a trust deed, a legal document that outlines:

  • The Trustee: This can be a person or a company that holds the property.
  • The Beneficiaries: Those who will benefit from the trust.
  • The Property: Held in trust by the trustee for the benefit of the beneficiaries.

The trustee is the legal owner, but the beneficiaries receive the benefits, such as rental income or capital gains.

Types of Trusts

There are several types of trusts, each with its own advantages and disadvantages:

  • Self-Managed Super Fund (SMSF)
  • Discretionary Trust
  • Family Trust
  • Unit Trust
  • Hybrid Trust

Advantages of Using a Trust

  1. Tax Planning: Trusts provide flexibility in distributing income and capital gains to beneficiaries, potentially lowering the overall tax burden.
  2. Asset Protection: Trusts can help protect your assets from legal actions or creditors by separating ownership from benefit.
  3. Estate Planning: Trusts can facilitate passing assets to family members while minimizing taxes and avoiding estate disputes.

Disadvantages of Using a Trust

  1. Cost and Complexity: Setting up and managing a trust can be expensive and complex, requiring separate accounts and tax lodgements.
  2. Tax Thresholds: Trusts have different tax thresholds and may incur higher land taxes.
  3. Capital Gains Tax: Living in a property held in a trust can have capital gains tax implications.
  4. No Negative Gearing: Trusts cannot distribute losses, so you won't benefit from negative gearing and depreciation tax deductions.
  5. Complex Taxation Rules: Taxation rules for trusts are complex and vary between different trust types.

Get Professional Advice

Given the complexities, we strongly recommend talking to a property-focused accountant to explore your options. They can provide the best financial, tax, and legal advice tailored to your situation.

Welcome to the JKL Family

At JKL Real Estate, we’re here to help you feel at home in the world of real estate. Whether you're buying your first home or refinancing, our family-oriented approach ensures you have the support and expertise you need. Welcome to the JKL family, where your home buying journey is our top priority.

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