What structure should you use to buy your property?
Most people, when buying a home to live in with your spouse and your family, will buy the home as ‘Joint tenants’, that is, essentially each of you owns the whole of the property and (heaven forbid) anything happens to one of you, the other automatically inherits the whole property. The decision to be joint tenants or other will likely go on behind the scenes without you being aware of the choice. Your solicitor or conveyancer will simply mark one box or another on the contract. And hopefully there’s never an issue with this.
When you buy an investment property you must be aware that there are other ways to hold a property, like within your self managed super fund, or in a trust, or as is most common Tenancy in common.
If joint tenants means you each own the “whole” of the property, and are each entitled to it’s rent and profits equally, then, tenants in common almost becomes the default opposite: the ownership is clearly defined by the ‘shares’ which can be equal – like owning it 50/50 - or unequal & this is where it gets interesting for property investors.
Basically, as the legislation stands now property investors can claim a deduction for losses incurred in their ‘business’ of property investing, and the deductions follow the lines of ownership.
If you own 60% of the property then 60% of the rents and profits – and the losses – are attributed to you on your tax return & the balance to your spouse (or whoever owns the other 40%, and we’ll assume its split only between two for this example).
If you receive a tax deduction for a loss incurred, and you pay a higher tax rate than your spouse, then it follows you’ll received more back as a deduction against your taxable income and therefore potentially a tax refund.
Lets play devils advocate and say your spouse isn’t presently working – their 40% of the deduction receives exactly $0 refund, because of their (lack of) taxable income. Can you see how this has implications for the cost of you owning this investment property? Noone buys an investment for the loss – the negative gearing benefit is small compensation to encourage you to build an income for your future.
An additional complication is that capital gains tax also follows these lines of ownership which gets interesting when it’s time to sell = I reiterate my constant message though – don’t be afraid of capital gains tax, it’s not the ugly monster it is made out to be.
Bottom line it’s clear to see two things – structuring the ownership is a simple thing to do, and, you MUST receive professional advice before you decide upon the ownership structure for your new investment, and obviously this does not constitute professional advice.
Western Weekender Article https://issuu.com/weekenderpenrith/docs/westprop5aug/26