How to hold a property

If you are thinking of investing in property, it could prove beneficial to consider holding it in a trust or a Loss Attributing Qualifying Company (LAQC).

Brookfields senior associate Sandy Donaldson says LAQCs are particularly relevant for those on higher incomes (over $60,000 a year) buying investment properties. Using an LAQC to own property can help reduce your liability for personal tax, she says.

So how does an LAQC work? First of all, an LAQC is specifically designed to hold investment property, it is not an appropriate means to own any home you're going to live in. It can best be described as a limited liability company that can transfer losses to its shareholders, who generally are you and your partner who have become shareholders of that company.

The company can claim usual property expenses, including the interest component of the mortgage, rates, body corporate fees (if applicable), repairs and maintenance as well as depreciation.

"If, at the end of the financial year, after taking into account those expenses, the company has made a loss, the shareholders can reduce their income by the amount of that loss,'' Donaldson says.

"This means you can end up making a loss on the property, which is offset against personal income for tax purposes.''

Family trusts are another popular way to hold property. There can be considerable benefits to putting your own home into a trust, Donaldson says. For instance, a trust could provide creditor protection for your home if you own your own business. It can also be a very sensible entity for long-term estate planning as assets in a trust are not taken into account in testing of the elderly, provided the transfer of the home has been completed. Trusts can also be useful for couples in second relationships in helping sort out distribution of assets between `blended' families and new and former partners.

However, there is a gifting process with trusts that can, if you have substantial assets, take some years to complete as the maximum one can gift in one 12-month period is $27,000.

Donaldson says the perception that a trust will always protect you, and your investment portfolio, from future claims may not be the case. The structures need to be set in place properly and all gifting processes completed in a timely and accurate manner.

She warns it is important to take professional advice from a lawyer and accountant before forming an LAQC or trust. "In fact, the sooner you start working with your lawyer and accountant the better,'' she says. "You need to ensure you've set up the correct basis for any property investment portfolio before you even begin to build it.''

So, what is the best structure to set in place prior to investing? For the first-time investor, Donaldson says, the decision is affected by whether you will be making one investment or intend to build a property portfolio.

If it's a one-off purchase it may not be cost-effective to set up complicated holding structures. However, if you are considering building a property portfolio then the money will be well spent.