Maximising Your Property Investments: Exploring Different Ownership Structures

Maximising Your Property Investments: Exploring Different Ownership Structures

The power of leverage

Through leverage, investors can magnify their returns by using borrowed funds to purchase assets such as property and shares. Banks will typically lend up to 80-90% of the purchase price of a property, meaning investors can control a much larger asset than if they were to rely solely on their own funds.

Ownership Structures: Comparing the Options

A critical consideration before starting out in property investment is the choice of ownership structure and how this choice will impact your broader financial situation and goals.

1. Personal Ownership: The most common form of property ownership is by purchasing in your personal name, either as tenants in common or joint tenants. Personal ownership is a flexible choice with various tax benefits but limited asset protection and your property may be subject to creditors and litigation.

Pros:

  • Direct control over the asset and the ability to add value and force a capital gain.
  • A 50% CGT discount can apply after 12 months of ownership.
  • Negative gearing strategies can be used to reduce your tax burden.
  • The ability to use equity to purchase further properties.

Cons:

  • Limited asset protection.
  • Personal cashflow considerations.

2. SMSF Ownership: Setting up an SMSF and then borrowing to purchase property within the Superannuation environment can supercharge your retirement savings. Upon meeting a condition of release, property held in an SMSF that is sold while in pension phase is completely capital gains free. However, the lending criteria and compliance obligations when purchasing property through super is much more stringent.

Pros:

  • Concessional tax rates within super, including complete tax-free earnings and capital gains in pension phase.
  • Property can supercharge your superannuation savings using the power of leverage.
  • Increased protection against creditors.

Cons:

  • Increased regulatory requirements and compliance obligations.
  • Tighter borrowing restrictions within SMSFs.

3. Trust Ownership: Setting up a trust to invest in property can be a powerful strategy while investing. Trusts offer the ability to control an asset without legally owning it, meaning they offer an additional layer of asset protection. Discretionary trusts can be used to save tax by income splitting to family members on lower marginal tax rates. However, establishing and maintaining a trust can involve greater costs and ongoing administrative responsibilities.

Pros:

  • Asset protection and estate planning benefits.
  • Potential tax advantages through income splitting.
  • A 50% CGT discount can apply after 12 months of ownership.

Cons:

  • Initial setup costs and ongoing administrative requirements.
  • Unlike individuals, trusts don’t receive the land tax-free threshold.

Given the various ownership structures available it is critical to seek advice from legal and financial planning professionals to determine the most appropriate structure for your situation. The choice of structure will come down to one’s individual circumstances including their financial situation, risk tolerance and estate planning objectives.

As always, reach out if you have any questions on how to use the power of leverage and property investment to optimise your financial strategy.