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Buying a house in a Family Trust and renting backmadproperty [44 Posts]  Is it possible to purchase a property in the name of a Family Trust structure and rent back off the Trust. That rent being tax deductible?? What would happen you then did some renovations? How would they be treated from a deductibility/depreciation post of view? I thought I read this somewhere in a McKnight publication?? Hmmmm Cheers Boing - MadProperty tammy [150 Posts]  from a laymans point of view,   Terryw [6479 Posts]  You could do that, but remember discretionary trusts cannot distribute losses. So if there was a loss you could not offset it against your personal income. When your property becomes positively geared, then you will have a profit which you may have to pay tax on - which you otherwise may not have had to. Then there is land tax, and CGT when you sell. It may not be a good idea unless you are going to do it short term. ie if you intend to live in the place a short time before moving on. And don't forget you could also rent the place furnished and claim depreciation on TVs and furniture too. If any renovations etc were done, then the trust could claim a deduction - depending on what it was that was done it may be depreciation or a repair. Terryw madproperty [44 Posts] Thanks Terry and Tammy, I am a little confused. But would the rent that you are paying into the Trust be tax deductible? If so to whom or to what entity would this deduction apply? The trust would run at a loss I guess as loan and rental expenses would be greater that market rent paid by me. Thanks again Boing - MadProperty Terryw [6479 Posts] Just think of the trust as a person. They own the property, so any rent they would get would be income and any deductions could be taken off this income, including depreciation. If there is a loss, it is stuck in the trust - just as if you had a loss personally, you couldn't offset that against someone else's income Terryw madproperty [44 Posts] Thanks Terry, so those loses made after deductions etc would be then held in the trust and be offset against any capital gain in the future??? So as an example of a strategy then, if you were to rent out your PPOR for lets say an 8% yield and purchase another Property under a trust structure pay market rent and then any loss made after deductions would be held in trust and eventually offset against any capital gain in the future? When would the purchase of a property that you wanted to live via a discretionary trust be a good idea? Boing - MadProperty Linar [265 Posts] Hi MadProperty My family discretionary trust owns a property that we live in and pay rent for. We have no PPOR. We are, however, in a unique situation and this arrangement benefits us for the following reasons: 1. The property is on 46 acres. The CGT exemption for PPOR applies to the house and surrounding 2 hectares (or acres, I'm not sure which) only. Any capital growth in the property will be mainly in the land. So if we ever sold it we wouldn't get any real CGT exemption anyway. 2. We don't ever intend to sell the property. It is an estate and will hopefully be passed down to our children when we die. If they want to sell it when we are gone, they can pay the tax on it! 3. It is a reasonably expensive property and the monthly repayments are substantial. Our trust declares our rent as income and interest payments and other expenses as negative costs. The property is negatively geared to the tune of about $30,000 pa. However, the trust has its fingers in lots of pies and by staggering the sales of assets over the years we are able to offset income from these assets against the losses incurred in this property. 4. We are able to buy lots of stuff for the house (lawnmower, livestock etc) and claim it all as a tax deduction. We did our sums very carefully and spoke to our accountant about it and we were far better off buying it through the trust. Unless you are in a particularly unique situation, I can't see how you could be better off renting a property off your family trust. The CGT exemption is a really good reason to buy a property in your own name. The main reason we didn't buy in our name is because we will not get the exemption anyway. Hope that helps Cheers K trakka [253 Posts]  madproperty wrote: Thanks Terry, so those loses made after deductions etc would be then held in the trust and be offset against any capital gain in the future??? Exactly, unless you had another profit-making entity in the same trust. madproperty wrote: When would the purchase of a property that you wanted to live via a discretionary trust be a good idea? The most common reason: asset protection. For those in particularly litigous professions - eg company directors, doctors, business owners etc - the loss of the CGT discount is seen as a reasonable cost of having their home protected from litigation. This could also be achieved by having the spouse own the property, but sometimes the spouse is high-risk too. Also, as mentioned, if you have a Trust making a profit, you can offset losses on the Trust-held PPR against those profits. There are some specialist Trusts out there (not a standard hybrid Trust, but a tailored hybrid Trust particular customised for owning property) which may allow Trust losses to be offset against personal income. Some people are already doing this; I'm waiting on a ruling by the ATO. (Not their general ruling on all hybrid Trusts, which may take forever, but a private ruling that my accountant is seeking on their particular form of hybrid trust.) Terryw [6479 Posts] Hi I am no tax expert but think Captial gains cannot be used to offset income losses. eg if your trust has a property which is negative geared, then the loss is just rolled forward each year until there is income to offset it. Captial gains are not classed as income, so if the property were to be sold, then the loss could not be used to offset the capital gain - the gain must be distributed and the income loss carried forward. I can think of a few reasons to own your main residence in a trust. Terryw M.C. [2 Posts] Hello, However, is there a conflict of not being at "arms length" and you will be living in the home, and also benefiting from it as a beneficiary (technically)? We are interested in this strategy fro a number of reasons, one of which is that our current PPOR is almost paid off, and we were hoping to keep it as a rental, while we upgrade - so we have the problem that our equity is stuck in that house, hence it is not the most tax effective investment. Thanks! Terryw [6479 Posts] Hi Again MC I think you can do what you describe, but are ok as long as everything is done at market rents. A trustee has a fiduciary duty to the other beneficiaries of the trust so you cannot rip them off by charging yourself a lower rent and the ATO would be concerned about this too. But if everything is above board at market rates it should be ok. You can get the 6 year exemption from CGT, but am not so sure about the land tax as this comes under the Office of State Revenue who have different rules (Never though about this before). Renting from the trust will run into problems if the trust has no other income as it will likely have a loss. The loss cannot be offset against your personal income. Terryw |
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