Join our investing community

Investment Property Question

Discussion in 'Real Estate' started by navjit6, 2nd Nov, 2009.

  1. navjit6

    navjit6 Active Member

    Joined:
    2nd Nov, 2009
    Posts:
    30
    Location:
    Brisbane, QLD
    Hi, I'm new one this site and just wanted to know a few things.

    1. What does PPOR stand for?

    2. I want to buy an investment property with 2 other family members. Is it possible to get a loan under 1 name, and the property under all 3 names?

    3. If I buy an investment property (never live in it), then am I still eligible for the First Home Owners Grant in the future? I live in QLD.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    Principal Place of Residence

    Also known as your "main residence", this is where you normally reside (ie this is where your mail is delivered, and where you'd expect to spend most of your time. From a tax perspective, your PPOR is generally CGT free when you sell it, but you also don't generally get to claim the interest costs or expenses of owning a PPOR as an expense.

    I guess it is theoretically possible to do this, but I think you'll find that the banks will want all owners of the property listed on the loan to protect themselves - they will want you all to be jointly and severally liable for the loan (which means that they can chase any one of you for repayments should the loan be in default).

    Remember that it is the ownership of the property which determines who can claim what - not the names on the loan.

    So if there are three owners who each own 33.3% of the property, then regardless of who is listed on the loan, you will each get 33.3% of the loan interest as a deduction and will each have to declare 33.3% of the rent as income.

    Yes.

    The rules are:
    1. if you owned any type of property (IP or PPOR) prior to 1st July, 2000, then you are NOT eligible for the FHOG at all.
    2. if you have never owned property prior to 1st July 2000 and you bought an IP after 1st July 2000 which you have never lived in, you ARE still eligible for the FHOG when you buy a property and live in it
    3. if you have never owned property before at any time, then you are eligible for the FHOG when you buy a property and live in it

    More information here:About the first home owner grant—Office of State Revenue, Qld

    ... and more specifically about your question here: Eligibility requirements for the first home owner grant—Office of State Revenue, Qld
     
  3. navjit6

    navjit6 Active Member

    Joined:
    2nd Nov, 2009
    Posts:
    30
    Location:
    Brisbane, QLD
    Thanks Sim for reply :).

    "So if there are three owners who each own 33.3% of the property, then regardless of who is listed on the loan, you will each get 33.3% of the loan interest as a deduction and will each have to declare 33.3% of the rent as income."

    That is the reason, we want to get the property under 3 names, to spread the gain for tax purposes. Is it best to sell after 12 months so that you only pay 50% of CGT?
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    Yes, you should generally aim to hold for at least 12 months so you get the 50% CGT discount.

    Real estate is generally a long term investment, so unless you are specifically looking to turn over the property quickly (ie renovating and reselling) or if the real estate market is booming strongly, you should be expecting to hold for a few years.
     
  5. navjit6

    navjit6 Active Member

    Joined:
    2nd Nov, 2009
    Posts:
    30
    Location:
    Brisbane, QLD
    If I am considering to invest with 2 family members in multiple IP's, is it beneficial to set up a business (3 people), so that all income and expenses are determined easier. i.e. can make bank account for business, use credit card, have IP loans in business account, etc.
    What are the benefits? What are the disadvantages?

    The reason I do not want to set up a trust at this stage is because
    1. we are just starting out.
    2. the cost factor.
    3. the beneficiaries would only be us 3 at this time.

    Is it easy to add beneficiaries to trusts after the trust has been made?
    Is it possible to transfer IP's to trust account? If yes, is this expensive?
    Is it better to incur the costs of setting up a trust now, instead of later?

    Thanks for you help :)
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    Using a company structure to own real estate and other investment assets is generally a bad idea as companies do not qualify for the 50% capital gains discount for assets held for over 12 months.

    I think your two options are either holding individually or using some form of trust structure.

    If you are aiming to get some form of negative gearing benefit from the property, then owning in your own names is possibly the better choice - discretionary trusts do not allow you to negatively gear (losses are quarantined within the trust and cannot be used to offset personal income). There are hybrid trusts which in some circumstances allow you to achieve a degree of negative gearing, but there are questions about how the ATO treats hybrid structures and so you'd need some very good advice before you went down this path.

    There are two types of trust structure you could consider.

    A discretionary trust allows you (or more specifically, the trustee) to determine each year which of the beneficiaries gets any income or capital distribution from the trust - the "discretionary" part allows you to arbitrarily choose.

    Alternatively, a unit trust enforces equal value between the units, so all distributions are allocated evenly between all unitholders (this is how a managed fund works). You could potentially have multiple classes of unit holder - but that's adding a lot of complexity which is probably not necessary.

    The type of trust structure depends on how you intend to distribute income/capital gains ... if you want a choice in who gets what, then discretionary, if you want to make it always equal, then a unit trust.

    There can be issues with adding beneficiaries to discretionary trusts after it has been set up - it could lead to additional stamp duty being paid unnecessarily. There is no such problem with unit trusts - you can simply add additional units.

    You can gift a property to a discretionary trust - it might lead to a CGT event being triggered for the owner (although if the beneficiaries of the asset don't change, you might be able to avoid this - advice required here, I'm not sure of exactly what is possible). I'm also not sure of the stamp-duty implications of gifting a property to a trust. I don't know of the implications of using a unit trust in this situation.

    In general, the advice I was always given was to start with the end in mind. If you plan on holding multiple properties over a long period and asset protection might be an issue, then start with a trust - even though it is expensive when you only own one or two properties, as you accumulate more, it becomes more and more worthwhile. Transferring assets into a trust later will add potentially far more cost than it would have to start with a trust in the first place (although this does depend on the exact circumstances).
     
  7. navjit6

    navjit6 Active Member

    Joined:
    2nd Nov, 2009
    Posts:
    30
    Location:
    Brisbane, QLD
    I understand that using a company structure is a bad idea. What I meant to say was to get an ABN, under our three names, and use that to create a separate bank account, credit card etc for all income and expenses relating to investments. Is it possible to do that? Isn't this different from a company? The only reason I was thinking of doing this was to separate personal and investment income/expenses. Would we be able to get investment loan under the business name?

    For a unit trust, are losses also quarantined within the trust? Are future year gains offset by previous losses?
     
  8. Saskatoon

    Saskatoon Well-Known Member

    Joined:
    17th Oct, 2005
    Posts:
    67
    Location:
    Aldgate, SA
    Hi,
    I think what you are describing will be a partnership. While easy to set up there are many disadvantages. The usual recommendation is for all parties to sign a Joint Venture Agreement which defines obligations, benefits, what happens if there are disagreements or changes in circumstances of individuals. Do a search here and on the Somersoft forum (Somersoft Property Investment Forums).
     
  9. navjit6

    navjit6 Active Member

    Joined:
    2nd Nov, 2009
    Posts:
    30
    Location:
    Brisbane, QLD
    thanks for your input :)
    the somersoft forum is good. thanks!