Should you buy property under your name or a trust?

If you're considering buying a property, you might be wondering whether it’s better to buy it in your own name or under a trust structure.

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Trust structures can offer significant benefits, but they also come with certain drawbacks.

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Basically, a trust structure is an ownership arrangement where the legal owner (the trustee) is not the ultimate beneficial owner of the property. Essentially, a trust separates control and ownership of the asset.

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For example, a person or company may own a property on behalf of another person or group. This provides separation between the asset's legal owner and the beneficiary who will gain from it.

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Trust structures are used to manage and protect assets, and they can be particularly useful in property investments.

Advantages of a Trust Structure

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1. Asset Protection

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One of the biggest advantages of buying property under a trust is asset protection. A trust is a separate legal entity, which means that if there’s any legal action against you personally, your assets in the trust are usually protected. Since your name is not directly attached to the property, it is much harder for creditors to access it. This can be particularly beneficial if you are in a profession with high legal exposure or if you simply want to safeguard your assets for the future.

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2. Tax Benefits and Flexibility

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Trusts provide flexibility in distributing income and capital gains, which can lead to significant tax savings. When a property is held in your name, any rental income or capital gains are taxed at your personal tax rate, which could be quite high if you earn a substantial income. However, under a trust, you can distribute income to beneficiaries in lower tax brackets, such as children or family members, potentially lowering the overall tax burden. The trustee has the discretion to choose how much income is distributed to each beneficiary, which allows for strategic tax planning.

Disadvantages of a Trust Structure

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1. Higher Costs and Complexity

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Setting up and maintaining a trust can be expensive. Unlike an individual tax return, a trust requires separate tax returns, which can significantly increase accounting fees. On top of this, there are initial costs associated with creating a trust, including legal fees, and ongoing costs for maintaining it. This can make a trust structure less appealing, especially if you’re just getting started in property or if you have only one property.

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2. Loss of Certain Tax Benefits

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While a trust can offer tax flexibility, it also comes with certain tax disadvantages. For example, if you purchase property under a trust, you may not be eligible for land tax exemptions that individuals typically enjoy. In states like New South Wales, there is a land tax-free threshold (e.g., $600,000), meaning that properties below this value are exempt from land tax. However, trusts do not qualify for this exemption, and you will have to pay land tax from the first dollar of the property’s value. This can lead to a significantly larger tax bill, especially if you own multiple properties under the same trust.

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3. Restrictions on Distributing Losses

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While you can distribute income under a trust, you cannot distribute losses. Losses, such as those from negative gearing or depreciation, can be carried forward to offset future profits within the trust but cannot be used to offset other personal income. This may reduce the immediate tax benefits you could otherwise enjoy if you owned the property in your name.

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4. Difficulty in Obtaining Financing

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Getting a mortgage for a property under a trust can be more challenging than purchasing in your own name. Lenders often view trust structures as higher risk due to their complexity, and this can lead to increased scrutiny, more paperwork, and potentially higher interest rates. It may also take longer to secure financing, which could delay your property purchase and reduce your competitive edge in a hot market.

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Which Option is Best?

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There’s no one-size-fits-all answer when it comes to choosing between buying property in your own name or under a trust.

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If you’re a first home buyer it’s best to try and get all the government incentives and tax benefits that you can. When you’re more established it is often a better time to start working with an accountant and looking at the best ways to build your portfolio.

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