Ownership of Investment Property

Question

What sort of structure should we use to buy our next investment property?

Overview; My wife and I currently own a duplex we developed from a single
vacant lot originally with the view to rent out. We have now changed our
minds and are currently selling them. The contract dates are more than a
year apart, and are in both our names.
I look like ending the year with a taxable income of 107,407.00. My Wife is
a stay at home mum and runs her own Graphic Design Business, this year looks
like a 9,500.00 taxable income. I estimate a gain of around 95k to be
shared between us, after tax this will pay out the remainder of our mortgage
on the family home.

After becoming mortgage free we wish to invest our equity into another
residential rental property development. This time for at least 4 years.
Again buy a lot, subdivide, build and rent, this time possibly a triplex,
with a budget of 1,050,000.00
Going forward in 4-5 years I expect a taxable income of around 130k. My wife
will still be looking after our young children and doing some work from home
20-30k.

With a time line of 4 years+ I can see a gain of 300-400k. So the question
is what is the most cost effective way to own the next investment property?.
I my name, I see it could reduce my taxable income dramatically. But then
give alot of that back in CGT. In both our name’s, I see my wife isn’t
earning enough to be tax effective. Possibly a different structure?


Regards
Norm

Answer

My best guess for the tax thresholds in the year you sell will be as follows:
Children under 18 allowed to have $4,666 in income without paying tax
0 – 6,000 0%
6,001 – 37,000 15%
37,001 – 180,000 30%
180,001 + 40%

Offset Amount Tax Free Income* Starts to Shade out Lost at Tax Rate While Shading
2,100 20,000 30,000 82,500 19% till $37,000 then 34%


Note family payments your wife may receive will reduce her carried forward losses and of course the 15% tax bracket makes a mess of negative gearing so I am very much against using her name during the loss period. At that rate it would be even better to store up the losses and at least be able to fully utilize them when you make the capital gain this can be done in a discretionary trust with a family trust election. For example say you had accumulated $100,000 in losses by the time you sold and the gain was $400,000 after the 50% CGT discount the gain is $200,000 then deduct the losses accumulated over the years leaves $100,000 in taxable income to be distributed. If you have at least 2 children then nearly $10,000 can be distributed to them tax free. The balance going to your wife which will put her in the same tax bracket as you. If she has gone back to full time work by the time you sell then if the $90,000 odd gain takes her to a higher tax bracket then you the discretionary trust will allow you the flexibility for the gain to be distributed to you instead. The trust will also make it easier to put some of the gain into super if that is an option at that time. There is also the benefit of giving you just enough to bring you to the top of the 30% bracket leaving her under the $82,500 so she get some tax offset. With a discretionary trust you can plan that accurately.

The downside of all this is there is no nice tax refunds now while they are being rented out. This will be very costly, you will need to crunch the numbers and get out your crystal ball. Certainly if there is any chance you will be retired or on a low income when you sell the properties then consider using your name only.

Another advantage of the discretionary trust is that you will have asset protection this is quite relevant during the construction period.

If you create another source of income that is not from personal services it could be undertaken in another trust and could then distribute profits to the trust with the triplex in it to offset the losses. Anything like this on the horizon?

Can you afford to delay the tax benefit till you sell?

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