Property tax tips: Types of investment structures – individual/joint names
Continuing on from our July edition regarding the factors to consider when choosing an investment structure, this month we’ll focus on the first type of structure – investing in your own name or in a joint name with a spouse or partner.
For most people the easiest way to acquire property is to purchase it in your own name or joint name with a spouse or partner. This is one of the most common structures and also one of the most simple.
One of the biggest advantages is its simplicity and thus low cost. There is no actual structure to set up and no fees or compliance costs that other structures incur. You don’t need to take any specific action in order to purchase a property in this manner, you are ready to act immediately.
If you choose to sell your property, you are also able to utilise the full 50% capital gains tax discount (if you hold the property for more than 12 months). When you invest in your own name, you can take advantage of negative gearing by offsetting any losses against income such as salary or wages. Depreciation on your property also acts as a tax free ‘cash back’ each year. And lastly, you can pre-pay interest for up to 12 months and get an interest deduction.
This type of structure has two main disadvantages, both of which can have long-term effects on your wealth. The first is that there is no asset protection. If you or your spouse or partner were to be successfully sued, your property may be taken to pay off your debts.
Secondly, it is quite an inflexible structure when it comes to distribution of income or capital gains which can have big tax implications. To minimise your tax, if a property was producing an income even after interest expenses on the loan, you would ideally distribute income to the person with the lowest taxable income. Likewise when you sell a property, you would also want the capital gains distributed to the lowest income earner as they will pay the lowest amount of tax. If you are making an income loss each year on your property, then you would want that loss to be in the name of the highest income earner to offset their income.
Unfortunately investing using this structure can only allocate the gain or loss to the named individual (or shared equally amongst the joint owners). It does not provide the flexibility to make any decisions about income allocation as your circumstances change with time (such as when a negatively geared property becomes positive or a partner leaves work to raise children).
With all structures there are always positives and negatives that need to be considered when assessing the right structure for you.
Momentum Wealth and its affiliated entities are not Accountants. While all information is provided in good faith, you should seek your own independent advice in relation to all tax matters.