When it comes to investing in property, a familiar question that is often asked is, “Can I buy an investment property in a company name?”. In this article, we discuss in detail, everything you need to know about buying investment property as a property investment company. Our in-depth discussion will go further to suggest a more relevant question: “When should I consider buying property through a company?”
There are many synonyms for a company. A common name, mainly because of the US, for a company is a Limited Liability Company (LLC). It is a term that is often used because so many educational literature originate from the US. As a property investor, the majority of companies that are set up to buy and hold property are private companies. We use all these terms interchangeably throughout this article.
What are the main reasons property investment specialists advise the use of a property investment company?
The key feature of a company or LLC is that it is a separate legal entity. This is what makes this personal financial structure so popular. As a separate legal entity, a property investment company enjoys limited liability, which means the owners (shareholders of the company) are protected from liabilities.
Buying property in a company name has additional income tax benefits. This is because companies pay company tax rates, and a private company capital gains tax and can distribute income to the shareholder at a time when it is tax efficient to do so.
Experienced real estate investors know how to measure the advantages and the disadvantages of buying investment property in an invest property company name and make an informed decision on when it is worth setting up a property investment company and see the ongoing compliance costs as the cost basis an ongoing investment. This is especially true for savvy property investors who have built up a team of property investment specialists to help them make the best decisions when it comes to building an investment property portfolio.
It is also important to note that a director is required to manage the Property Investment Company. In many cases, the director(s) and shareholder(s) can be the same. But this is not always the case. Shareholders have the power to vote for the company director(s). As a private company, which is usually the case when buying investment property in a company name, shares are not as liquid as publicly listed shares. Another important factor to consider when reading through this article is that ownership of a property investment company is through the ownership of the shares. The company, in turn, owns the property (portfolio).
The main advantages of a Property Investment Company Structure
As mentioned above, the main advantages of buying property through a company are the tax benefits, the level of asset protection the structure provides, and the ability to take capital gain and distribute income in a tax-efficient manner.
Let’s take a closer look at these three main benefits.
Tax benefits of buying investment property in a company name
Company tax rates are generally lower than personal income tax rates. Especially for high-income earners. At the time of writing this article, the 2021 – 2022 tax period, the company tax rate for companies with an aggregated turnover of $50 mil or less is 25%. For all other’s companies, the top capital gains tax rate is 30%. This compares favourably to the corresponding top marginal income tax rate of 45%.
There is also the additional benefit of the accumulation of your profits and waiting for a tax-effective time to withdraw them. This means that all the after-tax income can be reinvested in the company and continue to enjoy the company tax rate on all future taxable income, instead pay tax at higher rates.
Investing in property through a Property Investment Company offers the owner a high degree of asset protection
Because your assets are purchased through your company, as a shareholder, they won’t be owned by you thus limiting your liability and protecting your assets. For example, if there is a circumstance where the owners of a property are sued, only all the assets owned by the property investment company are exposed, nothing more. A similar scenario is true if there are any cash flow difficulties that expose the owners to risks of loss through lawsuits.
It is important to emphasize that asset protection is at its maximum for the shareholders of a company. This is different from the director of a company, but this topic is one for an entirely separate article.
Buying property through a company allows the owner(s) to distribute property investment income efficiently
When the time is right to distribute income, taxes paid by the property investment company can be passed on to the shareholders through franked dividends.
A franked dividend means that the dividend includes a franking credit. Franking credits are the tax portion of the dividend that the company has already paid. Because of franking credits, property investors who choose to buy investment property in a company name do not have to worry about paying income taxes twice.
In addition to this, owners can choose to distribute dividends during years where they have low-income tax liabilities, i.e., during years of lower income.
Buying property through a company does come with a few disadvantages
Because a property investment company is a separate legal entity, become an instant business owner, the company is obligated to fulfill many compliance and regulatory requirements. This is no different than filing status as for an individual who would need to complete annual tax returns, have proof of identity, etc.
A major consideration to property investors when choosing to buy a property through a company is the setup costs as well as ongoing costs. These costs are both in terms of money and time.
Tax disadvantages of buying investment property in a company name
There are two main disadvantages to owning real estate through a property investment company when compared to investing in rental property as an individual or as a group, and these are:
- Companies can’t take advantage of paying corporate tax rate of 50% CGT discount on the property when owning a property for over a year.
- Companies are not allowed to claim negative gearing benefits.
If there is a financial year where there is a tax loss on the property investment, these after-gains tax losses are held in the company until they are offset by future profits.
The setup costs of a property investment company are high
There is a high level of setup costs when it comes to establishing a company. It takes time and money to set up a property investment company. This is because the company is highly regulated, and requires a high level of expertise and knowledge to draw up the company constitution and set up the governance structure, such as appointing a director(s). This setup process usually involves a lawyer and/or an accountant.
For the experienced property investor, who has built a trusted team of property investment specialists, the decision of when to begin this journey of buying property in a company name is an easier one.
The setup costs of a property investment company are high
There is a high level of setup costs when it comes to establishing a company. It takes time and money to set up a property investment company. This is because the company is highly regulated, and requires a high level of expertise and knowledge to draw up the company constitution and set up the governance structure, such as appointing a director(s). This setup process usually involves a lawyer and/or an accountant.
For the experienced property investor, who has built a trusted team of property investment specialists, the decision of when to begin this journey of buying property in a company name is an easier one.
Buying property in a company name comes with high compliance obligations
There are also a lot of ongoing compliance obligations to investing in property through a company. These include the preparation of detailed tax returns and annual financial statements.
As a separate legal entity, companies are highly regulated, and there are ongoing compliance fees such as ASIC requirements/fees, etc. ASIC stands for The Australian Securities and Investments Commission and is tasked with regulating registered companies, amongst other things.
At Strategic Investors, we use a range of property investment tools and processes to help prepare for real estate investing. This is of paramount importance for all our clients to ensure this right solution is set up.
Verdict for property investors who are beginners:
Investors who fit this category generally require lower levels of commitment, in terms of both compliance and setup costs, when it comes to real estate investment.
The level of knowledge and experience for real estate investors who are just beginning to build their property investment portfolios are also not high enough to leverage all the benefits of buying property through a company to outweigh the disadvantages.
For this reason, it is highly recommended to seek a professional property investment strategist to guide you though the maze and identify the optimum time to invest in property.
Our general advice score for this group of investors is 2/10 for investing in property through a property investment company.
Our verdict on buying property through a company
Our average general advice score for investing in property as a company is 5/10.
Remember, every property investor has different sets of personal circumstances and different goals and aspirations. Always seek the advice of a property investment specialist to tailor the right property investment strategy for your personal circumstances.
As is customary to our articles in this series about property investing through the use of various legal entities available to you, we conclude the article with some closing remarks for real estate investors with different levels of investment property experience.
Verdict for property investors who are experts:
The need for asset protection increases in correlation to the increase in the value of the properties in a property portfolio. With more experience comes the level of competency to leverage to full benefits of levering the term capital gains tax advantages available to owning property through a property investment company. Larger and positively geared properties often benefit from the tax advantages available to companies. And these advantages can be extended to the shareholders to their maximum benefit. Our general advice score for this group of investors is 8/10.
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Weighing up the pros and cons of buying property through a company
Using the Strategic Investors Personal Financing Structure scorecard, we assess the merits of buying property through a company name. As always, our assessment is aimed at a general audience. Remember to seek professional advice when formulating your own strategy.
- Leverage: It is often more difficult to get approved for a home loan when buying property through a company. Many companies are charged business banking rates, which often incur higher interest rates. In the case of a property investment company where the director(s) and shareholder(s) are the same, there is a risk that the director(s) are “jointly & severally liable” for the loan. Our general advice score for Leverage: 2/10 for Leverage.
- Compliance: The level of compliance of a property investment company is relatively high compared to other personal financing structures. This is because companies are registered and regulated legal entities. Our general advice score: 3/10 for Compliance.
- Setup Costs: A high level of compliance generally means that there are a lot of setup costs to meet compliance standards. Therefore, our general advice score would be similar to the compliance score. Our general advice score for Setup Costs: 3/10 for Setup Costs.
- Asset Protection: This is a major benefit to property portfolio investors when it comes to buying investment property in a company name. Shareholders are protected from liability, hence the US name for these kinds of personal property financial structures, the LLC. We touched briefly on some nuances of liability when it comes to directors, especially when a company takes on a loan that is guaranteed by the director of a property investment company. Our general advice score: 8/10 for Asset Protection.
- Property Taxes: When it comes to income tax, that is the tax bill, there are many advantages to buying property through a company. These advantages are especially true for positively geared investment properties. Our general advice score: 6/10 for Tax.
- Liquidity and Flexibility: A property investment company offers liquidity and flexibility that is available to the shareholder of the company that would otherwise not be available to and investor who invests in property as an individual or a group. Ownership of a property is held indirectly through shares. Shareholders can sell their shares to another party without the need for the sale of the underlying property or properties. Because of the regulated nature of companies, even for private companies, there is a high degree of comfort that an accurate value of a share can be determined: 6/10 for Liquidity and Flexibility.
- Wealth Transfer: The wealth transfer pattern of investing in property through a company shares many similarities to the liquidity and flexibility factors. Transfer of ownership can be passed from owner to owner without a change in the property ownership as it appears on a title deed. Our general advice score is 6/10 for Wealth Transfer.
