WHICH STRUCTURE SHOULD HOUSE YOUR PRIMARY RESIDENCE?
For many people, their primary residence is not just a property. It’s a sanctuary, a symbol of security, and one of their most treasured assets. Many advisors will suggest you keep your primary residence in your own name because of tax reasons. But this is a big mistake! Your home is your haven; therefore, you must ensure that one of the assets you want to protect most has proper structuring in place.
Read our article, Home is Where the Heart is, but is it an Investment?
YOUR PRIMARY RESIDENCE AND CAPITAL GAINS TAX
As mentioned above, the reason why most advisors suggest that clients keep their home in their own name is for the capital gains tax savings they will achieve IF they sell their primary residence. There is an R2 million capital gains exclusion on your primary residence.
Practically, this means that if you have a R2 million capital gain if you sell your primary residence and are in the highest tax bracket, you will save R360 000 in capital gains tax.
Capital gains tax saving = [R2 million (Capital Gain) x 40% (Inclusion Rate) x 45% (Tax Bracket)]
This is the most you can save by keeping the property in your own name. But this benefit comes at a cost…
4 PITFALLS OF KEEPING YOUR PRIMARY RESIDENCE IN YOUR OWN NAME
Firstly, your property won’t be protected if anything happens to you financially, as you don’t benefit from total asset protection in the same way trusts do. Secondly, the property will form part of your deceased estate one day, resulting in more costs at death. Thirdly, it will result in you being able to get less financing for your investment properties (if your primary residence is mortgaged) because of the debt exposure on your own name. Lastly, there may also be some negative tax implications.
Most people don’t think that anything will happen to them financially. Yet, people are losing their homes daily because of financial distress. Protecting your home is thus a priority.
Read our article, Why You Need At Least Two Trusts and How to Use Them Correctly.
HOW TO PROTECT YOUR PRIMARY RESIDENCE WITH THE CORRECT STRUCTURES
When it comes to safeguarding your primary residence, proper structuring is key. Trusts are an attractive choice for property investors because they are such powerful protection tools. I always suggest putting your primary residence in one of two places: In a company with a Holdings Trust holding the shares in the company or your Family Trust. Each structuring option offers several advantages, and deciding which one to use depends on your unique circumstances and financial goals.
COMPANY OWNERSHIP
With company ownership, you can treat the property as an investment and enjoy tax benefits while living in it. Moreover, your property will be shielded from personal financial liabilities, won’t form part of your estate or be subject to inheritance tax, and may enable better financing opportunities for other investment ventures.
Company ownership also works well if you intend to change your primary residence to an investment property that will be rented out. Simply put the property in a company with a Holdings Trust holding the shares and rent it out to yourself.
In this way, you will probably have tax savings in the first few years while you are living in the property. Your property will also be protected, will not form part of your deceased estate, and you will be able to get better financing in your other entities. One day, when you move out, you simply put another tenant in your property and continue with the property as an investment property structured correctly in a property company.
FAMILY TRUST
If you plan to stay in your home long-term or sell the home when you move out, then it makes sense to put the property in your Family Trust. Again, your property will be protected, will not form part of your deceased estate, and you will be able to get better financing in your other entities for investment properties.
Watch our YouTube video on Why You Need to Have a Separate Family Trust.
When you put your primary residence in your Family Trust, consider paying extra into your bond to pay this property off as soon as possible. If you must sell the property, you can use the conduit principle in the Family Trust to drastically reduce your capital gains taxes. By keeping your primary residence in a separate Family Trust, you can also rest assured that your property is more protected if something happens to you or your property investment portfolio for which you signed surety.
Proper structuring of your primary residence is paramount for long-term financial security. And while the allure of capital gains tax savings may tempt you to keep your primary residence in your own name, the potential risks and limitations far outweigh the benefits.
They say home is where the heart is. By placing your home into the proper structure, you can safeguard your home, optimise your property portfolio, and keep the heart of your family beating strong.
Read the entire article in the May Edition of Real Estate Investor Magazine.