When you’re buying residential property, you’re focused on what to buy, where to buy it and how much you’ll spend.
In the effort to get the “what”, “where” and “how much” right, it’s easy to overlook the “who” – the name to appear on the title as the property’s legally recognised owner.
There are four forms of ownership: personal name, company, trust and self-managed super fund (SMSF). Each one has implications for your property’s security and tax-effectiveness.
It’s important to determine the appropriate one before you buy, because if you change it afterwards, you could be up for thousands in additional stamp duty and/or capital gains tax (CGT).
Each form of ownership suits different personal circumstances and has a range of pros and cons.
You as an individual, or with other individuals, appear on the title to the property. This form is suitable for the majority of residential property owners. This includes people who are buying a home to live in, because it enables them to claim a full CGT exemption.
It also includes people on high-salaried incomes who are buying an investment property and want to use negative gearing benefits to reduce their tax bill.
On the flipside, owning a residential investment property in your own name means that when it becomes positively geared, or is sold, you must pay tax in your name at your marginal rate.
A company is a separate legal entity. It can own assets, must pay tax on them and lodge tax returns.
But company ownership is not appropriate for owner-occupiers because companies aren’t eligible for a full CGT exemption. Nor is it suitable for residential property investors because companies can’t get the 50 per cent CGT discount applicable to property held for more than 12 months.
Unlike an individual or company, a trust is not a separate legal entity. It’s a vehicle to hold assets on behalf of nominated beneficiaries. Trusts enable you to minimise the tax liability from rental income and capital gains by distributing them among the beneficiaries.
They also offer a good level of asset protection. On the downside, trusts can only distribute profits, not losses. This makes them unsuitable for residential property investors who rely on negative gearing benefits to hold their assets.
Self-managed super fund
Most Australians have their super in a fund managed by a third party. However, a growing number run their own funds. The main reason to buy residential property in an SMSF is because of the concessional tax rate: 15 per cent on money held in the fund and zero when they are withdrawn on retirement.
SMSFs aren’t appropriate for owner-occupied property or holiday homes because assets in the fund cannot be for personal use.
The form of ownership has a significant impact on the security and tax-effectiveness of your residential property portfolio and this can change with your circumstances, so it’s vital to seek advice from your tax adviser or solicitor.