Understanding Trust Structures for Property Investment: Pros and Cons

Property trusts have been around for many years, mainly used by investors to protect their assets and cut down on taxes. Not many people use trusts when buying property, even though they work so well. So, let’s chat about what exactly a trust is, what’s good about buying property through one, and what’s not so great. That way, you’ll have the lowdown and can decide what’s best for you.

What is a Trust Structure?

A trust structure entails ownership where the legal owner isn’t necessarily the beneficial or ultimate owner. Simply put, an individual or entity holds the asset on behalf of another, establishing a distinction between asset ownership and benefit reception.

Advantages of Buying Property in a Trust:

1. Flexibility in Income and Capital Gains Distribution: Trust structures offer the flexibility to distribute income and capital gains among a designated group at the discretion of the trustee, deviating from the conventional ownership model.
2. Legal and Financial Protection: Trusts can shield properties from becoming part of an individual’s asset pool during legal or creditor actions, providing an added layer of security.

Disadvantages of Buying Property in a Trust:

1. Cost and Complexity: Setting up a trust structure incurs considerable costs and complexities, involving additional accounting, documentation, and lodgements, thereby escalating administrative burdens and expenses.
2. Tax Implications: Trust structures may attract higher land tax rates compared to individual ownership. Additionally, tax implications such as capital gains exemptions and restrictions on utilizing tax deductions pose challenges, potentially reducing overall tax benefits.
3. Inflexibility in Loss Distribution: Unlike individual ownership, trusts cannot distribute losses incurred from investment properties, limiting the immediate tax relief available and prolonging the period for achieving after-tax profits.

Is a Trust Structure Suitable for You? Deciding whether to opt for a trust or individual ownership demands careful evaluation of your specific circumstances and objectives. Each approach comes with its set of advantages and disadvantages, necessitating a thorough understanding of long-term implications.

Seeking comprehensive legal, financial, and tax guidance upfront is paramount. Failure to consider all factors involved could lead to unforeseen complications and financial setbacks, such as stamp duty and capital gains tax liabilities.

In conclusion, the decision to purchase property within a trust structure or under personal ownership hinges on a multitude of factors. By weighing the pros and cons and seeking expert advice, you can navigate the complexities of property investment with confidence and clarity.

We maintain a professional connection with Steve McKnight, the face and owner of propertyinvesting.com, renowned for his publication titled “From 0-130 Properties in 3.5 Years” This book offers an extensive reservoir of insights and a comprehensive understanding of the advantages associated with acquiring property through a trust structure. Particularly noteworthy is its chapter on how such a strategy can enhance further borrowing capacity to that of personal ownership. Given its esteemed status as one of the best-selling property investment guides in Australia, we highly endorse this book.

Chris Berry

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