Successful property investing is easier than most people think. The mistakes that prevent most would-be property millionaires from realising their potential are predictable and easy to avoid. In this series of blogs, Den details each of the most common mistakes and how to ensure you don’t make them.
Mistake number 2: Buying in the wrong entity or structure
Too many property investors give little or no thought to the legal entities in which they will own property. Most simply purchase their properties in their own name. Without understanding the benefits and drawbacks of the different legal structures for property ownership, the chances of choosing the best structure is very slim.
How to find out about the different legal entities for property ownership
There are many great reasons to have regular meetings with your accountant; finding out about ownership structures is one of them. Prior to purchasing any property you need to be clear of the purpose that particular property will serve in your portfolio. There are two likely outcomes;
You are purchasing a negatively geared property – this is a property which will effectively cost you money. Your main reasons for choosing negative gearing are probably capital growth or tax reduction.
You are purchasing a positively geared property – this is a property which will effectively put money in your pocket, regardless of the capital growth potential.
Of coure, we’re not accountants or legal experts so we spoke with Australian accountant Noel May from Noel May & Associates recently. You can listen to the full interview with all the property investing tax advice here.
Here’s a brief summary of what Noel told us:
Tax laws are different for different legal structures, so the tax law for a company is different from the tax law for an individual, and so on. This means that some structures are more suited to some kinds of investments than others.
Negatively geared properties
Noel says it’s may be best to buy negatively geared properties as an individual. The financial loss that negatively geared properties make can be used to reduce taxable income. To maximise this advantage, couples could consider buying their property in the sole name of the person in the highest tax bracket.
Positively geared properties
Money earned from your positively geared properties effectively increases your taxable income. Noel suggested, therefore, that it might be better for couples to have the property in the sole name of the person in the lower tax bracket. This will reduce the tax payable. You could also consider forming some kind of discretionary trust for your positively geared properties, as long as this discretionary trust offers you a lower tax rate than what you would otherwise pay.
What if we have both types?
The tax situation depends on the type of investment you’re making, so Noel recommends having different entities for each different strategy you employ. Therefore your negatively geared properties could be in your name while your positively geared properties are all purchased in a trust. Properties you wish to sub-divide or renovate could be bought in a third entity. This way you can ensure your legal entities all match the specific purpose of each property.
So what can we learn?
The take home advice here is that it’s best to speak to an accountant to find out what entity is best for you. Mortgage brokers can give some very useful tips but they don’t have the expertise that an accountant has. While an accountant may charge you a fee, it’s certainly worth every penny in the long run! The bottom line is that you need to pick your structure to match your strategy, so make sure you know what your overall goals are and speak to an accountant – preferably one that understand property investing.
What can we do now?
Contact your accountant! You’ll be able to ask advice on the types of properties which might suit you best, as well as strategies to reduce tax and build up your portfolio faster. If you’d like property investing tax advice to speak with Noel, you can find some great tax advice and his contact details at his website, Noel May & Associates.
Good luck with your investing!