Most residential housing areas in Australia continue to increase in terms of price, but that has not quelled the thirst of many for investing in property. A lot of us would think that it may be going up now, but the price increase should slow down at some point.
For those who are inclined to dive into the property market as an investor, it is a must that you equip yourself with essential knowledge. We are not just talking about where you should invest, although its importance cannot be underestimated. Instead, we’re referring to that commonly overlooked aspect – how you should own the property. It’s how you protect your asset by looking at the bigger picture rather than just considering the short-term returns and tax deductibility of the said investment.
Whose Name is on the Deed?
To be more specific, you need to pay extra attention to the name on the title. Contrary to common practice, you shouldn’t be putting the property under the name of the highest earner.
Why is this not advisable? The problem is that a lot of investors only consider the negative gearing of the property, and that’s just one thing you have to think of. Negative gearing benefits may be enticing, but what if you make a decision to sell? In the event the property is under the highest earner’s name, the proceeds of the entire capital gain will also be named after that individual, making it impossible to split the sale proceeds with those who have lower income.
It is also essential to look at possible depreciation, since you will have to add this if you do decide to sell. You will discover that this affects capital gains in such a way that it would be higher than expected.
What are your Intentions?
Consider your plans for the investment. How will you pay the debt, how much time do you need, and what other debts do you have? Depending on your answer, negative gearing might only occur for a short time. Another situation is that interest rates might remain low and then rents rise. That could set you up for positive gearing, meaning the highest income earner may not be making a profit after all.
Tax deductibility is another consideration, although it’s just one of many. Some people do not put their name on the title just yet for asset protection. Those who have their own business or are susceptible to liability claims may find the above option a good one. In NSW, land tax could put the investment in a family trust, which may not be attractive, meaning companies are unable concessions in capital gains, and that’s not a good route.
Self Managed Super Funds
However, there’s the option to get a special unit trust wherein a self-managed super fund (SMSF) or family trust holds the units. You can even think of buying a property directly within SMSF. While there are strict protocols within this option, it offers much flexibility and safeguarding of the asset.
In conclusion, having a property under your name is simple and easy. But sometimes it exposes you to consequences such as paying more tax along the road, so you need to really decide well.