Correct purchase structure
Question from Russell updated on 18th March 2019:
We are looking at selling our house and buying a rural property with two homes on it. We would live in one house and rent out the other. We are complete novices in this sort of thing. The estimated rental is around $450 a week. I understand we would have to pay tax on this, but can we claim a portion of our mortgage interest and other expenses back? We would be looking at a mortgage of around $250,000 to $350,000. Would establishing a trust be the way to go?
Our expert Matthew Gilligan responded:
You are right in that any rental income you receive on the second dwelling is taxable, and any expenses incurred in deriving that income are deductible. That includes a share of the interest payments that you will make due to borrowing money to buy this property and a share of the rates and insurance.
The more interesting question here is the appropriate structure for this purchase. In general, we like the private homes of our clients to be held in trust ownership. We see this as providing the best structure, generally speaking, for asset protection and long-term estate planning purposes. However, we like rental properties to be held in a company because it provides the best range of flexibilities for tax and legal purposes.
This property is a mix of both, which means it may be appropriate for the ownership to be split between a trust and a company in a tenants-in-common structure. This allows you to isolate the rental activity and keep it away from the trust, which we see as useful for preserving the trust as a low risk entity. It also means that you can get your bank debt arranged so that you maximise the amount of interest able to be claimed as deductible.
This is something that expert asset planners like GRA can help you with. I suggest you look to get specialist advice before proceeding with settlement of this property to get the structure right.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.