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
CheerstammyMember@tammyPost count: 155
from a laymans point of view,
My understanding is that the rent has to be set at market value and you would lose your CGT discount.
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.
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.
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
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?
What purpose does this serve for the investor?LinarMember@LinarPost count: 567
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
KtrakkaMember@trakkaPost count: 257madproperty 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.)
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.
1) if your property is larger than 5 acres and you don't get the CGT exemption, then you may as well use a trust as you are not giving up much.
2) if your property is going to be lived in temporarily and will revert to an investment property once you move out.
3) If you already own a property which you can continue to claim as your main residence
4) asset protectionM.C.Member@M.C.Post count: 2
Thanks for posting this topic – and for every-ones replies, as we too are considering if purchasing a property we want to live in, should be held in trust, while we rent it back to ourselves, as you say MadProperty.
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.
However, I seemed to remember the ATO will allow one to keep the PPOR status on one's home for up to 6 yrs) if you intend to return to it – so I'm assuming the CGT & land tax exemptions still apply in this instance.
I would also appreciate it if anyone can offer, or refer me to information about the mechanics and accounting issues for this strategy IE:does this also mean you forego any the tax benefits – and what about declaring the rental income received?
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.JacMMember@JacMPost count: 2,270trakka wrote: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.
I'm currently trying to get my head around whether to buy investment properties in a trust, or in my own name. Is it the case that I need only concern myself with trust if I was in a "particularly litigous profession" as described above? Or are people finding it's best to buy all IPs in trusts?
I'm merely aware of the cost of setting one up, and having its accounts done each year. Don't want to cause myself more hassle and cost if it is not necessary.
Welcoming everyone's thoughts and experience!Dan42Member@Dan42Post count: 620
Just to clarify, revenue losses can be offset against capital gains, but capital losses can not be offset against revenue profits.
The only reason I would recommend it is if you were in a unique situation like Linar where your home was surrounded by more than 2 hectares of land. I would say the capital gains PPOR exemptions and land tax exemption outweigh the benefits of losses in the trust, which are quarantined anyway.
Also, what happens when the rent is more than the deductions? You will be paying income tax, as well as land tax and CGT when you sell.
To me, generally, the benefits of buying a PPOR in your own name outweigh the benefits of buying in a trust.auscom2004Member@auscom2004Post count: 1
I would like to ask about asset protection in the family trust managed by a company. And you are not listed as a benifactor.
Say for example the ATO wants to send you banktupt to recover your debt. Can they get your assets/family home from the family trust that is managed through a company setup.
Trust assets are separate from personal assets. So if you were to go bankrupt they are not treated as your own – with a few exceptions such as if you transfered a property you owned to the trust with the intention to defeat creditors etc.
I have a family trust which I use for my business. The trust owns a warehouse (valued about $300,000) for my business. When I close my business, I am planning to lease the warehouse.
My mum owns our family house. When she dies, she wants to pass the ownership of the family house to my family. I think that it may be better to pass the family house to my family trust such that when I die, the ownership of the family house will be automatically shared by the beneficiaries of my family trust without me doing a will. I have no plan to pay rent to the family trust at all.
However, I am wondering when the family house is sold, what happens to CGT?, as normally, disposal of family houses are not subject to CGT? From reading the comments in this post so far, it sounds like that family trust is for business use but not for this sort of purpose.
HongDan42Member@Dan42Post count: 620
Trusts are not eligible to receive the main residence exemption for a principal place of residence, so there would be CGT payable if the house was owned by the family trust.
Secondly, how would the house be split after your death? Who would be the trustee of the trust? What if one child wants to sell and another doesn't? How would these questions be resolved?
Thanks. It is good to pop up another issue about assets owned by my family trust. I use a company as the trustee. My idea is to keep the assets owned by my family trust for at least next generation. That is why I would not worry about the situation in which one child wants to sell but not the others. My current business is losing money and I am going to close it and lease the warehouse. I am going to get some profits as the mortgage is very small. Can I offset past business loss with future rental income? Please advise. Thanks.
Your mum should looking into setting up a discretionary trust in her will, a testamentary trust. There are some pretty good tax reasons to do so – children can receive income and are taxed on the full adult tax thresholds.
But you should also look at owning at least one property in your own names so that you can get the main residence CGT exemption – this is too good to waste.
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