Trust matters
Question from Bhavik updated on 15th July 2020:
The Trust owns the property. As a beneficiary of the Trust I currently stay in the house and the mortgage is under my name. So when I buy my own house under my personal name, what is the best position to hold the current house which will then be an investment property? Is it to continue to hold it under the Trust or move it to an LTC? And what about the bright line test?
Note: the current mortgage will have to move to Trust after I purchase my own property as will have mortgage for the new one under my name.
Our expert Matthew Gilligan responded:
While I cannot give you a definitive answer without knowing more of your circumstances, I can outline what is likely to be the best structure for you. A key thing you want to achieve is a good mix of asset protection and tax outcomes. From an asset protection perspective, you want to protect any property that you occupy as your home in a trust. Accordingly, I suggest you settle the new home into your Trust.
From a tax perspective you want to make sure that your bank borrowing is structured effectively. The way to achieve this is to have a rental company established (which could be an LTC) and have that company buy your existing home (which is going to become a rental) from the Trust. The company can then undertake borrowing up to the purchase price of the ex-home and the interest on this will be deductible.
This will provide you with good asset protection and an effective tax outcome, but there are potential adverse tax consequences that need to be considered. One is the bright-line rule. If your existing home has been held for less than two years then the bright-line rule may apply to it, although there is a main home exemption. Be aware that a new five-year bright-line period will then apply to the property in the rental company. I would suggest you get specific professional advice to guide you.
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.
Search the Ask an Expert archive
Browse all questions in the Ask An Expert Archive »