This article identifies the ownership options available for investors when considering the journey of real estate investment. As each investor has different financial and personal circumstances some options will be more suited to you than others.
A sole trader is the most common ownership option for real estate investors. A sole trader buys and sells investment properties in their own name.
However, this form of ownership is high-risk leaving properties and other business or personal assets at stake if something goes wrong.
Unfortunately, a sole trader cannot take out insurance cover for asset protection.
On the other hand, a sole trader of a rental property allows investors to use negative gearing to significantly reduce personal taxes. Sole ownership also reduces the rate of capital gains tax paid if the investment is sold.
A trust cannot be classified as a separate legal person or entity for investors.
A trust is a relationship in which the trustee (investor) holds the title to property (trust estate or trust property) for the benefit of the beneficiary.
A trustee’s role is to manage the property held in the trust in which the legal ownership or assets can be handed onto others without the trustee losing the benefits of the assets.
Trust beneficiaries receive the benefits of the assets (this may be in the form of rental income, capital repayments or even the actual assets themselves) and the beneficiaries are taxed accordingly.
A trust can be a long-term security for personal assets for real estate investors.
A trust is also a great ownership option if an investor would like a property passed down to future generations of their family.
To ensure trust operations are governed and the trust deed is followed it’s recommended a trustee seek assistance from financial and legal professionals from the get-go.
A trust deed outlines the purpose of the trust and will determine its success or failure.
Self-Managed Super Funds
Investors have embraced the concept of SMSFs, in which they take control of their own retirement funds to pursue investment options, most popular being real estate.
SMSF consumers can enjoy many benefits including a lower tax rate of 15% on income and capital gains, or zero tax on the capital gains if the property is sold after retirement.
Money borrowed through a SMSF can only be used to purchase one property at a time and needs to be returned to the fund once the property has been sold.
It’s wise for investors to use their SMSF to purchase either commercial or residential property, as properties with high rental yields pay little tax in the accumulation phase.
Unlike buying investments as a sole trader which is extremely risky and offers no protection to your assets, a partnership is a structured business model in which two or more people pool their capital and expertise to manage a portfolio of real estate investments.
A partnership is a common method for investors because they are able to purchase large real estate investments and combine their skills and expertise to make it successful.
However like any partnership arrangement it requires a fair amount of trust.
Make sure you choose a partner wisely as each of you will be made accountable for all acts made by the other.
Joint tenant ownership is when there are 2 or more owners, and each owner is entitled to the possession of the whole property.
Before investors embark on a joint tenancy option it’s important to organise financial and legal paperwork, including Wills and protection of assets.
This type of ownership is often considered by those in a de facto relationship who are purchasing property together, but won’t provide equal financial contributions.
When contemplating a joint tenancy option, investors must consider what happens in the event of your passing.
By law, the property will pass to the surviving joint tenants, regardless of the beneficiaries noted in your Will.