Buying an investment property in a trust
Buying property in a trust can offer tax benefits and excellent asset protection for investors. Here's what you need to know.
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When you buy an investment property, the ownership structure you choose can have significant implications for your tax bill. Trusts are becoming an increasingly popular ownership structure for Australian property investors because of the tax benefits, asset protection and estate planning advantages they offer.
Before setting up a property investment trust, make sure you get legal advice and know exactly what you're getting into.
How does a trust work?
A trust allows a person or company to own assets on behalf of someone else or on behalf of a group of people. The trustee is the person that owns or controls the asset, while the beneficiaries of the trust are the person(s) for whom the asset (e.g. a property) is owned.
There are three main trust structures property investors use: unit trusts, family discretionary trusts and hybrid trusts. Under a unit trust structure, the assets the trust owns are split up into portions known as “units”. The trust beneficiaries then own these “units” in a similar way to that of shareholders owning shares in a company – their share of the income and expenses is proportional to the number of “units” they own.
A family discretionary trust is probably the most common type of trust for property investors. Also referred to simply as a family trust or a discretionary trust, this type of structure is usually set up to hold a family’s assets. The trustee can use their discretion to distribute the trust’s income and assets to the beneficiaries, allowing the family members to take advantage of tax benefits.
A hybrid trust is a combination of a unit trust and a family discretionary trust. It allows beneficiaries to hold units in the trust, while at the same time giving the trustee the power to distribute income as they wish.
Why buy property in a trust?
The biggest advantages to buying an investment property through a trust structure are:
- Asset protection. One of the main features of a trust structure is that the investment property is held in the trustee’s name, not your own – so in most cases, the trust’s assets are protected from creditors if one of the beneficiaries goes bankrupt or is the subject of legal action.
- Tax benefits. Family trusts allow the trustee to split the income between beneficiaries in the most tax-effective way each year. If the investment property is held by the trust for more than a year, you can also take advantage of a 50% capital gains tax (CGT) discount.
- Estate planning. Each trust features a trust deed – a document which outlines the rules the trustee must follow and what will happen to each beneficiary’s share of the trust’s assets upon their death. This simplifies the estate planning process and can help avoid any messy legal battles within families.
If you’re interested in setting up a trust to purchase an investment property, you may also want to research the trust home loan options available.
Things to be wary of when buying property using a trust
There are a couple of key issues to be aware of when you’re considering buying property using a trust. Firstly, if you individually own an investment property and you decide to transfer it into a trust, the trust will typically need to pay stamp duty and the individual will be liable for CGT.
Secondly, if the trust makes a capital loss or a rental loss on an investment property, there is no option to offset that loss against other investment income. This means you won’t be able to enjoy any of the benefits of negative gearing.
Choosing the right ownership structure for your investment property is a complicated and confusing task. To find out whether a property trust is right for you, ask your accountant or financial planner for advice specifically tailored to your situation.
Property trusts explained
Setting up a family or unit trust to buy an investment property should not be confused with professionally managed property trusts. Also known as property funds or property syndicates, these trusts allow investors to buy “units” in an investment property or multiple properties, with the fund managed by a professional investment management firm.
The money you invest remains in the property trust until the property is sold and the profits are distributed among the investors. Investors also receive distributions of income at fixed intervals, similar to the way companies pay dividends to shareholders.
You can choose to invest in an unlisted property trust, or a listed property trust which is listed on the Australian Securities Exchange (ASX). Whatever you decide, doing your research before choosing a trust structure for your property investment will help you make sure it works for you
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Ask an Expert
Hi,
I bought a property under family trust, and now I want to transfer it under my name since I am the director. I’m just wondering whether it’s possible, and how much does it cost to transfer the ownership?
Thanks.
Hi Faramarz,
Thank you for getting in touch with Finder.
It is possible to transfer the property to your name from a family trust, but it depends on the nature of the trust itself and how it can be vested or dissipated. This is specified in the trust deed. I suggest that you seek professional help from a lawyer as you need legal advice on this matter.
I hope this helps.
Thank you and have a wonderful day!
Cheers,
Jeni
Hi, can some of the beneficiaries of a family trust be Non Australian Resident and live overseas ? Thanks
Hi Aymeric,
Thanks for your question.
Yes, non-Australian residents or those residing overseas can be beneficiaries of a family trust. However, it would be best if you seek legal advice on this matter to understand its legal and tax implications.
I hope this helps.
Cheers,
Anndy
I would like to know how to get out of a family trust on a property. Also, we are divorced. I do not live on the property.
Please help
Hi Bell,
Thank you for getting in touch with finder.
Regarding your enquiry, I suggest that you speak to your lawyer or contact a Family Dispute Resolution provider to help you sort out your property arrangements and understand your options.
I hope this helps.
Have a great day!
Cheers,
Jeni
Hi, my partner and I already have a discretionary trust. We are looking to purchase a property within the trust with my parents. Can we add my parents as trustees to an already established trust then seek an appropriate loan to suit?
Hi James,
Thanks for your question.
With a discretionary trust, the “Appointor”, which is named in the Trust Deed has the power to remove and appoint trustees. One of the occasions an appointor can add/remove a trustee(s) is when the trustee dies, becomes bankrupt, or is incapacitated. I would suggest that you seek legal advice on this if your parents can be added as trustees or speak to your “Appointor”.
As for seeking out a loan, there are trust home loans available in the market that you can actually apply for. You’d be best to speak to a mortgage broker who can consider your circumstance and offer you lending options. You can also check the guide about trust home loans for further info.
I hope this helps. Should you have further questions, please don’t hesitate to reach out again.
Have a wonderful day!
Cheers,
Joshua
I have set up a Family Trust for rental property holding. I have applied for TFN for tax return. Do I also need to apply for ABN?
Hi Raido,
Thanks for your inquiry
Yes, you do. An Australian Business Number (ABN) is a unique 11 digit number that identifies your business to the government and community. An ABN doesn’t replace your tax file number, but it is used for various tax and other business purposes.
Hope this information helps
Cheers,
Arnold