Best Structure Options

[jace the ace]

Advice required for best structures for the following scenario:

We own 1 rental in our own names(husband & wife) & are looking @ purchasing another.Both properties will be cashflow positive.
Husband earns the higher income.

Looking @ purchasing other properties with another couple(husband & wife).Some may be as rentals(cashflow positive) & others may be buy & sells.

Can anyone recommend the best structures as far as asset protection/tainting etc.

[essence]

Hi Jace

Looking @ purchasing other properties with another couple(husband & wife).Some may be as rentals(cashflow positive) & others may be buy & sells.

You can make friends from business but not with friends in business.

Most Banks will want as much security as possible from all parties concerned (own homes and other rentals).

In the worse case scenario - if other party defaults on their credit cards, and it continues to be unpaid, then the Banks can sell all properties put up security. I kid you not.

It is worth paying for good legal and accounting advice before progressing with this. Don't let friendship and enthusiasm get in the way of good sound business decisions.

[Padeha]

If you do what you have suggested then you would be both a property investor and a property dealer.

A property investor derives rental income from owning a property and a gain on eventual sale of an investment property is generally tax free.

A property dealer is someone who buys and sells property in substantially the same condition and the gain/profit on sale is normal taxable business income.

Although a person who is both a property investor and a property dealer can buy both types of properties for income tax purposes a person who is a property dealer (that is a person who is in the business of buying and selling property) has to hold non business property (investment properties) for 10 years before the investment property can be sold on a tax free basis.

This is sometimes referred to as tainting in that the property dealing business taints the property investment properties making a gain on sale of an investment property (that might otherwise be tax free) taxable where the property is sold within ten years.

The reason for this rule (rightly or wrongly) is to prevent a property dealer from categorizing business properties/business income as investment properties/capital gains to avoid tax on business income. This is overkill in most people’s view but that does not change the law as it currently stands.

To avoid having to own investment properties for 10 years, most people seeking to engage in both types of activities would be advised to separate the investment activity and the business activity into different legal entities that are not associated with each other for tax purposes. In that way the property investment activity is not “tainted” by the property dealing activity.

However the recent tightening up of the associated persons rules make this segregation of activities into separate unassociated entities for tax purposes much more difficult as intended by the changes to the rules.

Commercially it is still advisable to separate more risky activities (e.g. property dealing) into separate entities (e.g. companies/trusts) from investment assets/activities or personal assets however you should be aware that this may no longer have the effect of defeating the 10 year rule (which was the intention of the changes to the associated person’s rules).

So before you embark on any type of property dealing activity you should be aware of the potential consequences for other non dealing properties bearing in mind that the “tainting” does not affect investment properties acquired prior to the commencement of the dealing business. You should probably factor in the possibility that a gain on sale of investment properties may well be taxable if circumstances require a sale within 10 years.

You should definitely seek professional advice on this. And don’t work with friends, children or animals!

[jace the ace]

Would it be advisable to purchase the new rental(husband & wife) in a trust or individual names.
Also should our existing rental be transferred to a trust or left in individuals names.

We want to keep the above rental properties seperate from the properties we will be buying with our friends.
We are also after advice on wether a trust/partnership/company structure would be best for the properties we purchase together with our friends.