Our interest and appetite for investing in property hasn't calmed down over the last 12 months, with most areas in Australia continuing to rise in price. Of course, that's not to say that prices are going to keep increasing. Just like the Melbourne Cup, it's a long race and at some point the gallop will end and we'll see a slowing down of house prices.
If you are still determined to enter the property market as an investor or you are a recent entrant, it's important to do your homework. By homework, I'm not simply talking about where you should purchase, which of course is critical. Instead, I'm talking about one of the most skated-over decisions that arises with property investment (or any type of investment) – how should you own your investment. This question means you have considered protecting your asset, you're thinking long term as not just simply maximising the short-term returns and tax deductibility of the investment you have purchased.
The decision I'm referring to is whose name the investment should be purchased in. That's because you shouldn't simply default (like many people do) to purchasing the property in the highest income earner's name.
Why wouldn't you default to this when negative gearing is so attractive for higher income earners? That's because too often investors are only focused on negative gearing the property, which is only one of the many things you should be considering. Yes, the negative gearing benefits can be attractive but what about when you sell? If the property is only in the name of the highest income earner (or 99 per cent in their name), the entire capital gain proceeds on sale will also be in the name of the highest income earner, which means there is no ability to split the sale proceeds with lower income earners.
It's also important to be aware that if you've had a depreciation report prepared and are claiming depreciation on your property (which is a great thing to do), you may need to add back this depreciation when you sell which means the capital gain could be even higher than your quick back of the envelope scratchings.
Instead, you should consider your plans for the property – if you intend to pay down the debt, how long you plan to hold it for and what other debts you have. That's because if it makes sense to pay down the debt, the property may only be negatively geared for a short period of time. Or if interest rates remain low and rents rise you may find yourself in a positively geared situation sooner than expected which may mean that the highest income earner holding the property may be non-beneficial.
Of course, tax deductibility is only one piece of the puzzle. Asset protection is another reason why you might not necessarily default to holding a property in your own name/s. If you own your own business or if your job means you might be susceptible to a liability claim, it might be wise for you not to hold assets in your own name. Of course, in NSW, land tax can mean holding your property in a family trust may not be attractive and companies don't get access to capital gains concessions so that might not be a great option. However, you might consider a special unit trust where a family trust or a self-managed super fund (SMSF) holds the units. You might even consider purchasing the property directly within an SMSF. Yes, there are strict rules with some of these structures you need to be aware of and follow. However, they can give you more flexibility in some cases and even a willingness to hold a property that is positively geared, as well as providing the advantage of an asset that is safeguarded because it's not in your name.
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Yes, owning investments such as property or shares in your own name is easy and simple. However, sometimes the unintended consequences of paying more tax further down the road, exposing your private assets to creditors or even less flexibility in a market of low interest rates and rising rents can mean that simple is not always better.
Melissa Browne is CEO of accounting firm A&TA and financial planning firm The Money Barre. Her latest book Unf*ck your Finances will be released January 2018.
