Introduction: The Big Decision— Which Structure to Buy Your Family Home In

Buying a family home can be a significant financial decision and emotional decision. But should you purchase it in your personal name, or would a trust or another structure be more beneficial? The choice you make can have long-lasting implications for taxes, asset protection, land tax, stamp duty, and financing. Let’s break down the key considerations so you can make an informed decision.

Main Residence Exemption: The Tax Implications

When you purchase a home in your personal name, you typically benefit from the main residence exemption, which means you won’t pay capital gains tax (CGT) when you sell the property, assuming it’s always used as a main residence. However, if you buy your home through a trust or another structure, you may lose this valuable exemption. The lack of a main residence exemption could significantly increase your tax liability when the property is eventually sold.

Income and Deductions: Charging Rent and Claiming Expenses

One potential advantage of purchasing a home through a trust or other structure is the possbility to charge rent and claim deductions on related expenses from renting the home out to your family. You might be able to claim deductions for interest on loans, maintenance, and other property-related costs. However, this approach can complicate your tax situation, making the financial benefits less clear-cut.

This won’t be possible for everyone and is only suitable on a case by case basis.

Asset Protection: Safeguarding Your Home

One of the main reasons people consider buying a home through a trust or other structure is asset protection. Holding your home in a trust or another entity type can offer some protection in case you personally get into legal trouble. However, this protection depends on the type of trust and how it’s set up. It’s important to weigh the benefits of asset protection against the potential loss of tax advantages and increased complexity plus cost in managing the property.

Increased Land Tax: A Potential Drawback

If you decide to hold your family home in a trust or another entity, be aware that you could face higher land tax obligations. In many states, trusts and other entities are subject to different land tax thresholds and rates, which can result in a significant increase in your annual land tax bill. This is an important factor to consider, especially if the property has a high value or if you own multiple properties.

Generally, a family home is exempt from land tax, which could be quite significant.

Stamp Duty Savings: A Potential Benefit

On the flip side, holding your property in a trust or another structure could potentially save you money on stamp duty if there’s a change in beneficial ownership. When a property is held in a trust, changes in the beneficial ownership within the trust may not trigger stamp duty, whereas transferring a property held in a personal name could result in significant stamp duty costs. However, these benefits vary by jurisdiction and require careful planning and legal advice.

Financing Challenges: Getting a Mortgage in a Trust

Securing financing can be more challenging when buying a home through a trust or other structure. Lenders often see these arrangements as higher risk and may impose stricter lending criteria, higher interest rates, or require personal guarantees. This can make it harder—or more expensive—to get the financing you need to purchase your home.

Key Considerations Before Making a Decision

• Tax Implications: Understand the impact of losing the main residence exemption and potentially higher land tax if you purchase through a trust or other structure.
• Asset Protection: Evaluate whether the asset protection benefits outweigh the potential loss of tax advantages and increased land tax.
• Stamp Duty Savings: Consider the potential for stamp duty savings if there’s a change in beneficial ownership within a trust.
• Financing: Be prepared for possible challenges in securing a mortgage when buying through a trust.
• Long-Term Goals: Consider your long-term financial and estate planning goals.

Conclusion: Weighing Your Options

Deciding whether to purchase your family home in your personal name or through a trust or other structure is complex and depends on your individual circumstances. It’s crucial to weigh the tax implications, potential asset protection benefits, land tax considerations, stamp duty savings, and financing challenges before making a decision.

For most people, it’s financially not worth buying the family home in another entity type. But those in high risk positions may find the benefits outweigh the costs. Please make sure you speak with your advisors before making a final decision.

We hope you’re enjoying our blog, just a note though. The information provided here is intended for general informational and educational purposes only. While we aim for accuracy, we can’t guarantee that this content will apply to your specific situation—every business owner’s circumstances are unique.

This blog is not a substitute for personalized advice from a qualified accountant, tax advisor, or any other professional. If you have questions specific to your individual circumstances, we strongly recommend consulting a professional for tailored advice.