Property Depreciation within HDT

Could somebody give me an indication of the impact/ differences of the deductable depreciation when purchasing an investment property within a HDT structure compared to buying the property under my own name?

Thanks in advance Salocker

 

Hi Salocker and welcome to the forum

providing the HDT makes an overall profit then it will not make any difference.

You may have a difference if the HDT has net income of say $3000 then less deprec of $4000 = loss c/foward of $1000.

If this was in your name you would get the $1000 as a straight deduction.

NickM

 

Thanks Nick

So what we are saying is that if the property within the HDT was negatively geared the depreciation will be carried forward as a loss?

If this is the case it could certainly have an impact on cashflow/ year end tax refund(s).

Other than making sure that you have positive cash flow properties is there any way around this?

Cheers
Salocker

 

As far as I understand it, the advantage of the HDT structure is the negative gearing benefits to the individual unitholders that aren't enjoyed by other types of Trust.

So the unitholders would get all the interest deductions related to the borrowed funds used to get that trust to generate a positive
$3K, but once the $4k depreciation is applied, that's a net loss in the trust, which can't be distributed.

I think the idea is that a HDT is good, but not a miracle

At least I * think * that's what I mean

Cheers
Carl

 

TryHard's got it.

N.

 

WooHoo !! I'm taking a day off, on the strength of that. I * told * Mary I would amount to something one day ;-)

 

I read it as that if you claim depreciation within the HDT you will reduce the profit, possibly to a loss and therefore have a reduced/ no distirbution at the year end.

This could be fine as long as you plan for it, however if you need the cashflow then it would seem monies are tied to the HDT for the short to medium term.

If anyone has an alternate opinion, it would be good to recevie it.

Cheers
Salocker

 

Hi Salocker

Remember that depreciation is a non-cash deduction, i.e. you don't outlay any money but you get to reduce taxable income.

I'd be surprised if a property, once the interest expense was taken out of the equation couldn't turn positive with only property related deductions...

Sorry, not trying to cut you off, just to understand your question.

Cheers
N.

 

Thanks Nigel

Agree re. that Depreciation is a non-cash deduction although it does turn into cash @ the year end when submitting the IITR.

You mentioned taking the interest expense out of the equation. How would you do this?

I thought that you would need to loan the HDT funds for the purchase of the property as from my understanding if you "gift" the monies to the HDT it will not be tax deductable in the personal tax return.

It would be great if you could clarify.....

Cheers
salocker

 

The way u make a HDT work, and one reason to use one is that the borrowing is in your name. Thus, provided you use the proceeds of the loan to acquire an income producing asset the interest is an allowable deduction which you can use to offset against your other income, eg. from your job.

The income producing asset which you acquire is the income units in the HDT. They will, broadly speaking, entitle you to the income from the assets which are acquired with the proceeds of that unit subscription.

That gets the money into the trust to buy the property. Bank gets a mortgage over the property as normal.

The trustee of the HDT is the legal owner of the property. As such it is entitled to receive the rent and incurs the deductions for repairs, maintenance, property management etc. It is also the entity which gets the depreciation. So basically you end up with a figure for the net income of the trust. That then has to be distributed each financial year. The holder of the special income units will get a certain proportion and any left over income, plus the proceeds of any capital gains can be distributed to discretionary beneficiaries.

Hope that make things a bit clearer.

Cheers
N.

 

That's great Nigel, it clears it up beautifully.

So in essence it's not a gift or a loan to the HDT its an acquisition of income prodcuing units. Interest payments do not get charged to the HDT therefore leaving enough revenue to offset the depreciation against without needing to carry forward losses and losing potential cash flow in the short/ medium term.

Cheers
Salocker

ps Nigel, thanks again for your information and time.

 

Realistically I would question any client that purchased an IP where the rent did not cover the basic running costs of the property (excl interest).

A HDT gives you many more benefits and much more flexibility than any other structure.

The majority of HDT's will generate a profit in year 2 if it is rented for a full year.
NickM

 

What are the implications then if the Trustee is a Company?

Am I a bit slow this morning... because I read the above and I'm still thinking *huh*??

 

Makes no difference. You personally remain the borrower, company as trustee owns the asset and gets the asset based deductions to create net income of the trust which is then able to be distributed either to income unit holders or discretionary beneficiaries as required.

Cheers
N.

 

I dont think that Nigel was saying the Trustee is you.

That would defeat the asset protection aspect of the setup.

Thats how I read it.

T.