5 Types of Property Ownership
Owning property in Australia could be a great way to build wealth and create a stable future for yourself.
There are many different types of ownership structures available, each with its own pros and cons. It’s important to weigh the pros and cons of each type of property ownership structure because there is no one-size-fits-all approach.
Instead, you need to consider the types of real estate ownership structures in light of factors such as your risk profile, income and expenditure, and your existing investment portfolio.
The property ownership structure you choose can be a significant factor in determining your tax obligations, estate planning and succession, and asset protection.
So, in this article, we’ll look at five different types of property ownership structures, including sole ownership, joint ownership, self-managed super funds (SMSF), companies, and trusts.
Sole Ownership
There are a few different options when it comes to ownership structures for investments in Australia. The simplest, and most straightforward, is to become the sole owner. This means that the entire property belongs to the individual in their personal name alone. And when the sole owner passes away, the property forms part of their estate for inheritance.
The main advantage of this structure is that it is very easy to understand and set up. Another major advantage is that the Australian Tax Office (ATO) affords individual owners the opportunity to claim various tax deductions, including depreciation, interest on their investment loan, and various rental expenses.
If you choose to opt for a negative gearing strategy, then you can also offset your investment loss from your other sources of income, such as wages and other investments. This could further reduce your tax burden.
However, while it may be the most straightforward structure to establish, there are a few drawbacks.
Firstly, it offers limited asset protection. This means that if you are sued or experience financial hardship, your investment property could be at risk. Secondly, your options for tax planning are quite limited with individual ownership because you can’t distribute any of your income or expenses to anyone else.
But, if you’re a relatively low-risk individual and your tax obligations are minimal, sole ownership could be a great ownership structure to start with. And if your financial circumstances become more complex, you could look into other ownership structures. At the end of the day, it’s all about identifying if the benefits outweigh the drawbacks in relation to your current circumstances.
Joint Tenancy and Tenants in Common
Another option is when two or more investors become joint owners. These can be either joint tenants or tenants in common. Joint tenancy means each owner owns an undivided share of the property and has an equal right to occupy it.
Joint tenants have an equal interest in the property. Tenancy in common, unlike joint tenancy, means that each owner owns a separate share of the property and can dispose of that share as they wish.
However, it can also complicate things if one owner dies and the surviving tenants (or surviving joint tenants) still own their share. Each property agreement has its own rules when it comes to death and distribution. So, for more information on the pros and cons of this type of ownership, make sure to check out our guide on joint property ownership in Australia.
Owning Property in an SMSF
Self-managed superannuation funds (SMSFs) are a type of superannuation fund that is managed by its members, who are also the trustees. SMSFs can invest in a wide range of assets, including property, shares, managed funds, and cash.
One of the most common reasons property owners end up purchasing property within an SMSF is to manage their investments and because there are several tax benefits available. For example, if you personally fall into a higher marginal income tax bracket, using an SMSF could save you money in the long run because the tax rate is only 15%.
What’s more, once you retire or reach the pension stage and can access your retirement savings, any future income from your investment property will be tax-free.
There are also significant capital gains tax discounts.
Beyond the tax benefits, asset protection is another reason investors steer towards SMSF investments.
However, when it comes to choosing an SMSF ownership structure for an investment property, there are a few factors to consider. Firstly, you need to make sure that your SMSF is compliant with all relevant regulations. Secondly, you need to ensure that your SMSF has enough money to cover all associated costs, such as stamp duty, legal fees, and ongoing maintenance costs.
Lastly, you need to make sure that your investment strategy aligns with your SMSF’s investment objectives. For more information on using your SMSF as a property investment vehicle, here is our guide to SMSF property investment.
Property Ownership Through a Company
Companies offer a number of advantages as an ownership structure, including limited personal liability, tax concessions, and asset protection.
The main advantage of this structure is that income derived from the property is taxed at 30%. This can be a significant tax saving for investors who fall into a higher tax bracket. Another advantage of this structure is that it provides asset protection from personal liability. However, it should be noted that this protection does not extend to company liability.
It’s worth noting, however, that the companies aren’t afforded the same capital gains tax discounts as individual owners, and as with SMSF ownership, there are various compliance regulations and legal obligations that you have to stay on top of. So, it could be costly to set up a company simply for ownership purposes.
But again, these drawbacks will entirely depend on your financial obligations and investment goals.
Trust Property Ownership
A trust is a legal arrangement in which assets are held by a trustee on behalf of beneficiaries. This can be useful when buying an investment property, as it can help to protect your assets if you become personally liable for debts.
Discretionary trusts are the most popular ownership structure option among investors as they offer good asset protection and flexibility in terms of how income is distributed.
A trust can also provide flexibility when it comes to succession planning. If you own the property directly, it would have to be sold or transferred to your heirs upon your death. But if the property is held in a trust, it can continue to be managed by the trustee according to your wishes.
However, trusts are not eligible for negative gearing concessions, so they can be less tax-effective than other structures if this is your investment strategy.
It’s important to seek professional advice before setting up a trust. Trusts are complex legal arrangements, and there are a number of factors to consider before entering into one.
Key Takeaways
The type of property ownership you choose will ultimately depend on your personal circumstances, but there are a number of different options to consider, including:
- trusts;
- sole ownership;
- companies;
- joint ownership; and
- SMSFs.
To help you navigate the different types of property ownership, we’ve covered the pros and cons of each option so that you can decide which is best for you based on your specific situation. However, we strongly suggest getting in touch with a qualified professional.
At Property Tax Specialists, our main focus is helping property investors maximise their opportunities and protection while legally minimising their tax liabilities.
We’ll get to know you and develop strategies that consider all aspects of your business, investments, and income, as well as family goals. Our emphasis is on protecting assets and taking advantage of legal constraints so we can minimise tax within those parameters.
To discuss any matter relating to the different types of property ownership, protecting your assets or arranging your affairs for minimum tax, get in touch today.
DISCLAIMER: This information has been prepared without taking into account your objectives, financial situation, or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation, or needs.
Amir Ishak is a Limited Authorised Representative 1269908 of Merit Wealth Pty Ltd, Australian Financial Services Licence 409361, ABN 89 125 557 002
