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Family trust confusion

Discussion in 'Investing Strategies' started by builder2818, 14th Jun, 2009.

  1. builder2818

    builder2818 Well-Known Member

    Joined:
    31st Dec, 2008
    Posts:
    89
    Location:
    Sydney
    I plan to buy my first investment property in the next couple of months and I have a family trust set up to do. I was recently told that when I decide to buy my PPOR I should get the loan in my name and then loan the money back to the trust and I can claim the interest payments on the loan in my name. Is this entirely true? How does it work?

    How does this work if you are paying market rent for the property and whether it was negative or positively geared? I don't have a problem with CGT exemptions as I would want to live in this place for a long time and have no plans on selling but instead keeping it as an "investment property"?
     
  2. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    Has your accountant told you this?

    Things you should know

    If it was that good and easy to implement everyone would be doing it
    Trusts have annual operating costs
    You could be paying land tax (if it's your PPOR you don't)
    You only get back your taxes
    If this property was your PPOR it would be capital gains tax exempt
    The legislation re trusts could change so a loophole today could be a closed loophole tomorrow and you could be stuck with a costly structure and little on no benefit at all.

    IMHO
     
  3. Jenni

    Jenni Active Member

    Joined:
    27th May, 2009
    Posts:
    34
    Location:
    Brisbane, Qld
    Hi

    In answer to your questions:

    1. I understand that if you borrow the money in your name and onlend to the trust then if the trust paid you below market rate interest ie what you were paying to the bank then you would be unlikely to be able to claim the "loss" as it was not an arm's length transaction. Borrowing in your name is often recommended as it is easier to get the finance, but in my experience our clients always onlent the money at the same interest rate as the bank charged them - and had a loan agrrement in place.

    2. If the rent you pay the trust is not enough to cover expenses the loss is locked in the trust and can't be distributed to beneficiaries. Also you need to work out how the trust is going to fund the shortfall.

    3. The trust will pay tax on the property ie land, capital gains, etc as it will not be eligible for any PPOR exemptions nor first home owner's grant, etc.

    Soory to be boring but it sounds like you need to get some good advice and educate yourself a little more before embarking on such a strategy.

    Hope this helps, or at least gives you some idea of the questions to ask a professional.
     
  4. GregR

    GregR Reid Consultants

    Joined:
    13th Jul, 2009
    Posts:
    273
    Location:
    Berwick Vic
    Builder2818,
    A trust can work well if you need asset protection but they are more problematic if you have a negative geared property. Generally you cannot pass the negative gearing benefits to beneficiaries. If it is a positive geared property, it becomes a different issue or where you have other income flowing into the trust, the rental losses can be offset against other income.
    If your trust has other positive income that you have to distribute, then you could use the strategy to 'rent' the property from the trust for yourself to live in. The trust borrows the funds to purchase and makes repayments. You have a arms length commercial rental agreement with the trust and pay weekly rental.

    Jenni and Billy are correct in additional costs incurred, is it worth the benefit?

    Some investors use a unit trust to get negative gearing out, by borrowing to buy units in the trust, the trust then purchases a property using the funds and net rental income is distributed to unit holders. There are some fancy hybrid trust around but lenders do not like either of these last two types of trusts, so lender selection becomes limited.

    I hope this helps.