Myself and 3 other investors are looking to purchase a block of 4 units to strata title and then some investors will sell (after 12 months) and others will keep one unit each.
What are the benefits and disadvantages to purchasing the block in the name of a unit trust with each investor holding one unit in the trust i.e. 4 units in total?
Two disadvantages to purchasing in the unit trust I see are:
1. Won't qualify for the 50% reduction in CGT after the asset is held for 12 months (as would be the case if held in individual names).
2. No ability to claim negative gearing within a trust i.e. if all costs are greater than rent coming in we can't offset the difference against other income earned as would be the case if we were to purchase in individual names.
Would somebody please clarify if the above disadvantages are correct and outline any other issues and advanatges to the unit trust path.
ThanksMortgagemanParticipant@mortgagemanJoin Date: 2004Post Count: 164
One drawback of a unit trust is that it will make it exceedingly difficult to fund your deal as a residential loan. If you used another form of trust, company or your individual names you should be able to get a residential loan for your project, which would greatly reduce costs.
Perry Financial Strategies
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Thanks Mortgageman. Do my other 2 disadvantages also hold true?TerrywParticipant@terrywJoin Date: 2001Post Count: 16,213
I don't know much about unit trusts, but think you are correct. I think the CGT reduction isn't available for unit trusts, but is with discretionary due to the flow through effect.
WIth the other, I think you may not necessariy be correct. The unit holders are able to borrow to buy the income producing units. So they could personally be able to claim the interest for the loan. This should leave the trust with low expenses and a profit (it rental income is coming in). From this profit, other deductions could be claimed and then the profit distributed to the unit holders.
There are stamp duty implications if some partners wish to sell and others keep, so I think you need professional advice on this one – many other things to consider too.