Is Buying Property Under a Trust the Right Move for You?
Buying a property is considered one of the biggest decisions in a person’s life, and many in Australia consider buying a property with a trust. It can offer a lot of advantages but has additional challenges. Let’s find out whether purchasing a house or investment property under a family trust matches your goals and circumstances.
Why Should You Buy a Property with a Trust?
1. Save Your Tax with Efficient Income Distribution
Beneficiaries are only taxed on their share of the trust’s net income. Trustees can allocate the rental income and capital gains from investment properties to beneficiaries in the most tax-efficient way every financial year. Generally, this involves distributing funds to beneficiaries in lower tax brackets, such as spouses or children, to minimise the overall tax burden.
2. Get Stamp Duty Exemption on Ownership Transfers
According to the Australian Taxation Office (ATO), transferring investment property from personal ownership to trust generally incurs stamp duty (a tax on property transfers in Australia). Capital gains tax (CGT) may also apply, particularly if the property has been owned for less than 12 months.
However, there may be exemptions from stamp duty when replacing individual trustees, provided stamp duty has already been paid on early trust transactions, such as when the property was initially transferred into the trust. In this case, a new trustee can become the legal owner without paying extra stamp duty. This exemption, which may vary between states, is applied when a trustee retires or resigns.
3. Ease Estate Planning and Profit Distribution
A property trust can help ownership transfer in events such as death, disability, or illness. The trust specifies how the trustee should act in these circumstances, reducing the chances of family legal disputes.
Also, trusts help distribute wealth from investment properties. Trustees are legally required to act in the best interests of the beneficiaries, ensuring transparent management of ongoing property income or profits from the sale.
4. Protect Family Assets from Creditors
A property trust can protect the family assets, including investment properties, from creditors if a beneficiary faces bankruptcy. That is because the trustee holds the legal ownership of the trust’s assets—not the beneficiaries. This protection is a key benefit of buying property in a trust.
How Can You Buy a Property Through a Trust?
The most common way to buy property in a family trust is by applying for a home loan (known as a trust loan). The trustee(s) usually submit a mortgage application with the lender on behalf of the family trust. The lender will then evaluate the trust’s financial position and creditworthiness.
However, applying for a trust loan can be a more complex process than a standard home loan due to the following factors:
A trust loan involves multiple parties, including the trustees, beneficiaries, and directors (if the trust operates as a company).
Most lenders will require all the trustees and beneficiaries to act as guarantors for the loan; additional paperwork may be needed.
Lending specialists will review the trust’s financial documents and legal documents thoroughly before loan approval.
What to Consider Before Buying a Property in a Family Trust
1. Family Trust Can be Expensive.
Setting up a family trust to purchase the property often requires legal expertise, which can be costly. The total cost to establish a family trust can range between $3,000 and $5,000 (plus GST), depending on the family trust structure and the number of trustees and beneficiaries involved.
2. Negative Gearing Concessions Don’t Apply.
When buying an investment property through a family trust, you cannot claim tax deductions for negative gearing. If the property expenses are higher than the generated income, the resulting loss cannot be offset against other income, unlike for an individual investor. The loss will remain within the trust until it generates sufficient income to offset the loss.
3. You Can’t Apply for Residence CGT Exemption.
A trust cannot claim the property exemption from CGT if the property is owned by the trust and used as the primary residence instead of being rented out. If the trust decides to sell the property, the transaction may also result in a tax obligation.
4. Financing Can Be More Difficult.
Because family trusts have intricate legal arrangements and the beneficiaries have limited responsibility, not all lenders can provide home loan products for family trusts. In addition to shielding beneficiaries from being held personally liable for the trust’s debts, this protection may make it more difficult for lenders to seize the assets in the event of a loan failure. Financing alternatives may also get more complicated due to the loan application process’s tendency to require more thorough documentation and eligibility requirements.
Is Buying Property Through a Trust the Right Move?
Looking at your financial objectives and personal situation, buying property in a family trust can offer substantial benefits. However, compared to standard mortgages, there may be higher standards for getting a trust loan. Lenders often consider trust loans as higher risk due to the limited liability of beneficiaries.
Questions to Consider
Before deciding to buy a property in a trust, ask yourself:
Am I searching for asset protection, tax advantages, or another benefit?
What role does a family trust play in my estate planning and financial goals?
Will the trust adapt to changes in my family or financial circumstances?
Given that the trustee has the power to make significant decisions on the property, am I happy with their level of control?
Given the challenges involved, it’s crucial to seek advice from legal or financial professionals. U Buyers Agents can help you determine whether buying a property under a family trust best suits your needs. Our experienced team can provide the right guidance through our professional buyer’s agent services, enabling you to evaluate if this strategy aligns with your long-term goals.
Considering buying a property with a trust in Brisbane? Contact U Buyers Agents today!