Structure for rental

Question from Jennifer updated on 24th February 2020:

We have our family home in a trust and are looking at purchasing a rental property. The rental would be negatively geared for some years. We still have a mortgage on our family home and we will use equity from there to finance. How is it best to structure this? Should we purchase the rental in our own names? We anticipate selling the rental once we retire. (We’re in our early 50's now).

Our expert Mark Withers responded:

In simple terms there is the choice of the trust you already have, a Look through company (LTC) or a partnership. Until recently a loss-making rental property would typically be structured to take advantage of the losses to offset personal income and save some tax at the personal level. This would require the use of a partnership or an LTC. Trusts were not favoured because losses could not be distributed to beneficiaries and had to be simply carried forward in the trust.

However, the Labour government has seen fit to ring fence residential property losses for the 2020 year onwards so there can no longer be an immediate tax saving by offsetting the losses against personal income. From a tax perspective that means you are essentially in the same position as the trust. It remains to be seen whether National will campaign into the next election by proposing to repeal any of these measures.

One factor is the fact that the trust is being expected to place its home at risk to support the borrowing. This is easiest to justify as being in the beneficiaries best interests if the trust also stands to benefit from the income and growth over time in the assets value. So my vote goes to the trust where there is protection for the asset. But it would be sensible to consult an accountant who can fully explain the advantages and disadvantages of each structure relative to your overall position and goals.



Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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