Late July I held another seminar for a group clients and contacts from the Bank of Melbourne and Riveren Property. I discussed a range of topics in relation to purchasing or owning an investment property, below is a bit of an overview:
Ownership Structure – What to Consider
Why are you buying the property? Is it for a tax deduction, therefore who is best suited to get the tax deduction? Is it to growing wealth, therefore potential capital gain implications need to be considered.
Joint Tenants – you own the property in equal shares and ownership can be passed without stamp duty and/ or capital gains
Tenants in common – you choose to own the property in shares. Stamp duty and or capital gains can apply
Asset protection
Protecting your potential investment from risk needs to be considered.
Do any of the potential purchasers have any risk, be it through owning a business or what is involved with their job? Property can be owned within different types of structures so picking the right person or structure is crucial
- Getting the right insurances cover (building, contents) is important
- Getting the right loan and reviewing interest rates can save you money as well as allow better growth
- Preparing wills and Pre-nup’s will enable protection and succession planning
Tax minimisation strategy
Negative Gearing – When rent received is less than on going property expenses you can claim a deduction for the rental loss against any other income such as salary, wages or business income.
Positive Gearing – When rent received is more than on going rental expenses this amount will be added to your other income and you will incur tax on this amount.
Once you own a property and rent it out, the main expenses that can be claimed include:
- Council Rates,
- interest expense,
- real estate agent fees,
- Insurance
- Travel expenses
- Depreciation expense
These things can’t be claimed in relation to your rental property is:
- Buying and selling costs of the property
- Expense not paid by you eg. Water or electricity costs paid by a tenant
- Expenses that are not related to your rental property, such as expenses connected to your own home
Purchasing an Investment Property in your Superannuation
Self Managed Superannuation Funds (SMSF) are not for everyone as you have to manage it yourself. Further, we advise you should have a minimum balance of cash for a SMSF before establishing one. SMSF’s are highly regulated and audited and take time to set up. The costs involved need to be considered.
There are rules around SMSF and property. You can only purchase a property in you your fund if:
- You pass the sole purpose test
- You are not buying from a related party
- You don’t live in or rent the property to a fund member or related party
The rules are different for commercial property. You can pay rent directly to your SMSF
You can borrow using a SMSF however:
- There a strict rules called “limited recourse borrowing arrangement”
- You need to make sure the whole of your SMSF is not at risk if the loan is defaulted
Items to consider
- Arrangement can only be used to purchase a single asset
- Time and costs taken to set up the arrangement
- Cash flow impact on your Fund
- It is hard to cancel
- Possible tax losses
- Cannot borrow to improve property
- 15% tax on earnings and discounted capital gain tax
As you can see the masterclass covered a lot of valuable topics for property investors. If you have any queries regarding the above, why not give me a call?
