What ‘structure’ or ‘entity’ to place your investment property into is a common question we at Wealth Buy Property are asked – especially with new investors.
Each type of entity has pros and cons – listed below are the options available (check with your accounting specialist as to which entity option will suit your situation best):
PARTNERSHIP:
A partnership, like individual ownership, enables you to offset losses against other income. These losses on your Investment Property are apportioned to each partner according to their share holding (the same goes for any profits made).
Drawbacks:
- No ability to income split a larger portion to a partner on a lower tax rate to minimise the amount of tax paid
- Lack of asset protection – you can be liable for claims against your partner or partners
- Potential to be ‘tainted by association’ with other partners
COMPANY:
One benefit of owning investment property through a company is that it offers limited liability, so your private assets won’t be at risk from any claims by company creditors.
With company ownership you can split income on a discretionary basis (by paying Directors’ fees and by employing a director-shareholder as manager)
Drawbacks:
- Inability to offset losses against income – any losses have to be deducted from future profits
- To access any profits the company has to declare a dividend to shareholders (which is taxed according to their personal tax rate)
TRUST:
Trusts are a great way of passing on assets to future generations. They have the flexibility to hold assets that are both investment and family owned (isolate the family home from investment properties). They offer the benefit of asset protection.
Trusts provide an opportunity to split income for tax purposes (allocate more income to beneficiaries on lower tax rates). They also offer flexibility in the distribution of profits.
Drawbacks:
- Like companies, trusts don’t allow for losses to be offset against other income with losses being accrued and deducted from future profits
- Trusts can be relatively costly to set up
LAQC:
One of the key benefits of an LAQC is the flexibility it offers in distributing profits and losses, as well as for restructuring. Losses can be offset against personal income (distributed to shareholders based on their shareholding).
Profits are distributed likewise.
LAQC also offers the ability to access capital gains from the sale of the property tax-free, and to restructure ownership of the company without having to pay tax on depreciation recovery.
Drawbacks:
- Banks may require individual shareholders to provide personal guarantees for mortgages taken out by the LAQC
- Individual shareholders are liable for tax owed by LAQC