Trust v Private Ownership

[Roses]

I own half of a residential property with an ex partner and, since selling our business in April this year, neither of us have found subsequent employment. The proprty is rented which just about covers the mortgage.

A friend advised me to get my trust to purchase my ex's share - my trust owns a freehold property which is currently rented. That way, the trust would have have one mortgage over two properties, which would easily be covered by the two rents.

My question is, if I do this, will this limit what I can do? Would I be better off purchasing the other half share in my own name. Basically, I'm hoping I can use some of the excess rent money as income, while I don't have any. Thanks

[Rosco]

Hi Roses,

If a Trust makes a profit, the Trustees could allocate all the profit to you. You would then have to pay tax on this income.

So whether the Trust owns or you own, you should be able to get the same outcome for tax and for cashflow.

A Trust is great structure for asset protection, but that doesn't mean it is the best entity for your rentals.

I would suggest discussing your exact situation with a property accountant, as your individual circumstances are likely to change the approach taken. For example if you buy a new personal house shortly, then you might want cash out of the rentals, which could make then run at a loss.

Also - Is the property a good rental? Does buying 1/2 from your ex help you achieve your goals, or are you better to sell?

Ross

[Nick G]

Seek advice... buying the other half of a cashflow negative property when you are unemployed doesn't seem too crash hot from where I am sitting but I don't know anything about your situation.

[Roses]

Thanks Ross, that's certainly helpful and food for thought. I wonder if any property accountants are involved in this group to contribute...

My trust property is mortgage free, would likely sell for around $800k in today's market and is currently rented for $650/wk. The rental of which I own half, would likely sell for around $480k, we purchased it for $420k, it has a mortgage of $390k and it's rented at $500/wk. So, buying half would cost me $45k (which could be paid from cash from the business sale) and I would assume the total mortgage of $390k, which would be paid from both rents. So it looks to me to be affordable and then I'm presuming I can treat the remainder as income? If I buy it in my name, I'm assuming I can't use the trust rent to contribute to the mortgage repayments?

Regarding a future purchase, to date, I've purchased two properties (the rental above and another rental which is in my sole name with equity of approximately $160k) entirely on the equity I had in my existing properties.

Currently I'm flatting until I can figure out my next venture, but ideally I'd have an income by then and buy another property to live in. How would I then run my rentals at a loss please? BTW, I'm 57 years old and have always considered the rental property (in my name only) to be my retirement fund. I'd like the rental I own half of also to be part of my retirement fund, but will the trust buying it affect that? Many thanks

[Roses]

Thanks Fanatical, everyones advice is very much appreciated. I have answered Ross above, so please feel free to add any opinion you may have.
Thanks
Roses

[Anthonyacat]

Looks like Fantatical's opinion disappeared? I never saw it.

Anyway, you may have missed that Rosco is himself a property accountant. Or that was a subtle joke your reply?

It sounds like you need to speak to an accountant about your overall situation. You should contact Ross or myself directly, or any other publicly practicing Chartered Accountant - ideally one who owns property themselves. But to answer your specific question, if you buy the house in your own name you can still use the trust rent to contribute to the mortgage repayments, from both a cash perspective (just take the cash from the Trust as Drawings) and a tax perspective (operate the property at a loss in your own name, and attribute some Trust tax profits to yourself at year end).

Regarding running rentals at a loss, Ross was referring to extracting equity from existing rental properties, to pay yourself so that you can buy your personal home using debt that is then deductible to the trust. This increases interest expense and so decreases the profit, or creates a loss if expenses exceed income. If the properties are owned a in trust this loss is 'stuck' inside until used up in future, instead of being available to you to offset against other income and get tax refunds. Short term this isn't a problem, but there are situations out there where people have hundreds of thousands of dollars in tax losses stuck inside a trust that they may never get the benefit from.

[Bobsyouruncle]

I wonder if any property accountants are involved in this group to contribute...

Both Rosco and anthonyacat are, that's why they answered you :-).

[jack2016]

Hi Anthony, how does one manage to have hundreds of thousands in tax losses when investing?

If I am at a loss understanding of how to form companies for taxation purposes, do I speak to a lawyer, an accountant, or someone else?

Thanks

Looks like Fantatical's opinion disappeared? I never saw it.

Anyway, you may have missed that Rosco is himself a property accountant. Or that was a subtle joke your reply?

It sounds like you need to speak to an accountant about your overall situation. You should contact Ross or myself directly, or any other publicly practicing Chartered Accountant - ideally one who owns property themselves. But to answer your specific question, if you buy the house in your own name you can still use the trust rent to contribute to the mortgage repayments, from both a cash perspective (just take the cash from the Trust as Drawings) and a tax perspective (operate the property at a loss in your own name, and attribute some Trust tax profits to yourself at year end).

Regarding running rentals at a loss, Ross was referring to extracting equity from existing rental properties, to pay yourself so that you can buy your personal home using debt that is then deductible to the trust. This increases interest expense and so decreases the profit, or creates a loss if expenses exceed income. If the properties are owned a in trust this loss is 'stuck' inside until used up in future, instead of being available to you to offset against other income and get tax refunds. Short term this isn't a problem, but there are situations out there where people have hundreds of thousands of dollars in tax losses stuck inside a trust that they may never get the benefit from.

[Anthonyacat]

Hi Anthony, how does one manage to have hundreds of thousands in tax losses when investing?

If I am at a loss understanding of how to form companies for taxation purposes, do I speak to a lawyer, an accountant, or someone else?

Thanks

Less so when 'investing' - more when developments don't go terribly well, or more active businesses falling over. It's a bit hard to lose six figures as an investor.

It's very straightforward to form a company, you can in fact do it yourself at the Companies Office website. It'll take a few hours and cost just under $200. But many (most?) prefer to get a professional to do this for them. Either a lawyer or an accountant can do this for you, though an accountant will usually be cheaper - from memory I charge $500, but it's listed on the pricing page of my website, which despite some effort still doesn't show up well on mobile devices!

[Roses]

Thanks Bobsyouruncle, I completely missed that, am am appropriately embarrassed! Appreciate the heads up.

[Beano]

Looks like Fantatical's opinion disappeared? I never saw it.

Anyway, you may have missed that Rosco is himself a property accountant. Or that was a subtle joke your reply?

It sounds like you need to speak to an accountant about your overall situation. You should contact Ross or myself directly, or any other publicly practicing Chartered Accountant - ideally one who owns property themselves. But to answer your specific question, if you buy the house in your own name you can still use the trust rent to contribute to the mortgage repayments, from both a cash perspective (just take the cash from the Trust as Drawings) and a tax perspective (operate the property at a loss in your own name, and attribute some Trust tax profits to yourself at year end).

Regarding running rentals at a loss, Ross was referring to extracting equity from existing rental properties, to pay yourself so that you can buy your personal home using debt that is then deductible to the trust. This increases interest expense and so decreases the profit, or creates a loss if expenses exceed income. If the properties are owned a in trust this loss is 'stuck' inside until used up in future, instead of being available to you to offset against other income and get tax refunds. Short term this isn't a problem, but there are situations out there where people have hundreds of thousands of dollars in tax losses stuck inside a trust that they may never get the benefit from.

If the Trust has tax losses stuck inside is the best way to free them by having income
Example's
1: purchasing a property that produces a profit
2: interest bearing loans to another entity
3: management fees charged to manage properties
Etc etc

[Roses]

Sincere apologies Anthony, I stumbled across this website and did not take note of who's who here, so absolutely no subtle jokes intended.

Thanks for the valuable advice. I do have a chartered accountant, but he's not a property accountant and is away at present, so I have been endeavouring to gain a better understanding of my situation through this site, in order to know where to direct specific questions to him.

So, in summary, I could buy my ex's share of the joint property in my own name, use the income from the trust as drawings to help pay the mortgage on it, then use the equity in both my rentals to buy myself a property to live in. (I don't fully understand the debt being deductable from the trust, or how the expenditure would exceed the income however). I presume then, that this could be a source of income for me while I plan my next venture, which is going to take a while to get off the ground at which time I will have no other income. Many thanks.

[Anthonyacat]

The use of equity in the rentals to buy a personal property wasn't previously discussed, and won't be tax efficient using the above structure. While you can most likely still do it, the debt used to purchase your private home will be non-deductible.

Great move coming to the forum to get a better understanding of things, but best to talk to your own accountant about specifics and structuring. Or if you're not confident in their ability, you get a one-off consultation or switch to another firm in whom you do have confidence.

[Roses]

Well Anthony, I would very much appreciate a one off consultation to point me in the right direction, although shifting accountants is not going to be an easy task at this juncture, unfortunately. I will email you directly. Many thanks