Rental Properties Under a Family Trust:

Buying Rental Properties Under a Family Trust Pros and Cons

Investing in rental properties through a family trust can offer numerous benefits, but it's essential to understand the costs, tax implications, and potential drawbacks before making a decision.

What is a Family Trust?

A family trust is a discretionary trust established to hold and manage assets for the benefit of family members. The trustee has the discretion to distribute income and capital among the beneficiaries.

Costs of Setting Up a Family Trust

1. Establishment Costs: Setting up a family trust typically involves legal fees, which can range from $1,000. 
2. Ongoing Administrative Costs: Annual administrative costs, including accounting and compliance fees, can range from $500 to $1,000.
3. Trust Deed: The trust deed outlines the terms and conditions of the trust and can cost between $500 and $1,000.

Advantages of Buying Rental Properties Under a Family Trust

1. Asset Protection: Assets held in a family trust are generally protected from creditors, providing a layer of security for the family's wealth.
2. Tax Planning: Income can be distributed to beneficiaries in lower tax brackets, potentially reducing the overall tax liability.
3. Estate Planning: A family trust can simplify the transfer of assets to future generations, avoiding the complexities of probate.
4. Flexibility: Trustees have the flexibility to distribute income and capital based on the needs of the beneficiaries.

Disadvantages of Buying Rental Properties Under a Family Trust

1. Complexity: Managing a family trust requires a thorough understanding of trust law and tax regulations.
2. Costs: The initial setup and ongoing administrative costs can be significant.
3. Land Tax Issues: In many states, trusts are subject to higher land tax rates. For example, in Victoria, land held within a trust is generally taxed at penal rates, unless the trust qualifies as an 'excluded trust' (e.g., a superannuation trust).

Land Tax Issues

• Higher Rates: Trusts often face higher land tax rates compared to individuals. In Victoria, land tax on trust-held properties is generally higher.
• Excluded Trusts: Certain trusts, such as complying superannuation funds, may qualify for lower land tax rates.

Viability in a Negative Gearing Scenario

Negative gearing occurs when the rental income from a property is less than the expenses incurred, resulting in a tax-deductible loss.

1. Tax Benefits: Negative gearing can provide tax benefits by offsetting losses against other income. However, these benefits may be less significant in a family trust, as the trust's income is only distributed to beneficiaries, Losses CANNOT be distributed.
2. Income Distribution: Losses from negatively geared properties cannot be distributed to beneficiaries, to reduce their overall tax liability.  Losses are retained in the Trust until Profits are made to offset them.
3. Long-Term Gains: While negative gearing can provide short-term  tax benefits, the long-term goal is capital growth. A family trust can facilitate the distribution of capital gains to beneficiaries in lower tax brackets.

Example to Illustrate

Consider the Smith family, who purchase a rental property through their family trust. The property is negatively geared, resulting in a $10,000 loss. This loss cannot be distributed to the beneficiaries to reduce their taxable incomes. Over time, the property appreciates in value, and the capital gains are distributed to beneficiaries in lower tax brackets, minimising the overall tax liability.

Gotax Advice

Gotax Tip: When considering buying a rental property under a family trust, weigh the benefits of asset protection and tax planning against the costs and complexity. Consult with a Gotax advisor to determine the best approach for your situation.

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By understanding the costs, tax implications, and potential benefits of buying rental properties under a family trust, you can make informed decisions to optimize your financial planning. Happy investing!