Why structuring is so important when building a property portfolio
If you ask three experts which entity you should buy property in, you will get three different answers.
You could probably buy property IN YOUR NAME if you only want to own one property. But if you want to build a property portfolio (aka the best way to build wealth), you need to have a proper structure in place.
Buying a property in your name is like running a business from a savings account. It may be cheaper, but it will not help your credibility or enable you to get funding in the future. For a business to be taken seriously, it needs to be a separate entity with its own annual financial statements, and the same goes for a property portfolio.
People are often advised to buy their primary residence in their name due to the capital gains exemption. However, this could stop you from buying more investment properties. Now, which is more important? To save taxes or build wealth?
When you buy property IN A TRUST, it is possible to build a much bigger portfolio than you would be able to in your name. The conduit principle that only applies to trusts is also a great mechanism to channel and split profits or capital gains to beneficiaries, which makes a trust even more tax efficient.
Another great benefit of trusts is that it does not form part of your estate if you are declared insolvent or pass away. There are no estate duties, capital gains tax or executor fees. But you will not have this benefit if you use a company unless a trust owns your company’s shares.
Buying property IN A COMPANY makes sense if a trust owns the company, but this structure is more expensive. And although the tax rate is lower, the conduit principle does not apply, which makes it very inefficient to move funds out of the company and benefit from your portfolio.
We believe the best option is to buy residential real estate in trusts, but commercial real estate in companies as there are often other shareholders involved.
Don’t miss out on our next seminar where we will discuss this in more detail.