The LAW on buying property with your friends using a trust
You’re probably at this article because you’re looking at the property market, seeing the potential, but realising you’re not going to be able to do it on your own.
You might be thinking of setting up a trust with a few others to buying property.
Here is some useful information that you might want to know.
Trusts are very flexible in reflecting the “deal” you have with your friends.
A trust is run by a manager (called the trustee) for the benefit of its owners (beneficiaries). In case you are wondering, you’d be the manager – you would probably set up your own company to do this. You would also be the beneficiary, presumably using a type of entity that would benefit from the capital gains tax discount (so a superfund or an individual).
The trust deed actually explains this whole relationship. You wouldn’t want to be using an online trust deed in a situation like this, it is just not customised enough.
Work on the trust deed together
When you do a trust deed properly it will reflect more than just the “standard” terms. It will reflect other things like how you will manage the property, who is responsible for what, when payments will be made, what happens if someone wants to sell, etc. There are a whole list of questions.
It might be tempting to get a standard document but if you do the process properly you will actually find out early if you are all on the same page. If you aren’t, there is no point going ahead because you will just end up in conflict down the road. You all need to be on the same page, and working on the trust deed and its terms ensures that.
Another thing it does is tell you whether you can work together. If someone is annoying you while working on the trust deed, chances are they will annoy you when you invest together. The difference is with the trust deed you haven’t really put much money into it yet. Once you own the property you are locked in.
Be mindful of financial disclosure rules
Once your group starts to include people you don’t know, or the size grows above $2m, you need to start thinking about financial services rules. You may need a financial services licence or someone with a financial services licence to help. This creates a whole heap more red tape and bureaucracy, but you won’t be forgiven for proceeding without knowing about it.
Think about the maths
There are a lot of complications arising from a tax perspective when it comes to trusts. For example, if the trust is losing money it is not always so easy to claim those losses against future income. The losses also can’t be distributed to owners or individuals for them to claim against their taxes. Hence the “maths” of a deal is important too. For example, you might be better off borrowing money in your own name so you can claim the interest against your taxes rather than getting the trust to borrow and not being able to use it.
If you do it right, it can be a beautiful thing.