When buying an investment property, you have several options for how to structure the ownership. You can choose to do it in your personal capacity, through a trust or in a company structure.
Choosing the right ownership structure for an investment property is one of the most important and often overlooked decisions investors make. The way you hold a property can affect everything from your borrowing capacity and tax position to asset protection and long-term returns.
Buying in a company name is one option that can offer benefits in the right circumstances, but it also comes with challenges that can cost you down the line.
1. Capital gains and other tax implications
Disclaimer: This section contains general information about tax. Consult a qualified tax professional before making decisions.
Capital gains tax (CGT) is the tax you pay on the profit when you sell an investment property or other asset that’s increased in value. If you hold the property for more than 12 months, individuals and trusts are generally entitled to a 50% CGT discount, meaning only half the gain is added to your income tax return.
Companies, however, don’t receive this discount. That can make a significant difference to your after-tax return.
For instance, Melbourne’s median dwelling value has risen about 17.5% over five years, according to Cotality. If you bought a median-priced property five years ago, it would now be worth $805,880. That’s a gain of around $119,880.
Held personally, only about $60,000 would be subject to tax. Held in a company, the full $119,880 would be taxed at the corporate rate.
One way to avoid this is to purchase the property in a trust, as trusts are generally eligible for the 50% discount.
Another tax consideration is negative gearing – a practice used by nearly half of Australian landlords in the 2022-23 financial year, according to the Australian Taxation Office.
Although sometimes controversial, many investment properties are negatively geared in the early years, meaning deductible expenses – such as interest on your loan and maintenance costs – exceed the rental income. This net loss can be used to reduce your taxable income.
If the property is held personally, the loss can generally offset other income, providing an immediate tax benefit. Companies, however, are different. Any negative gearing loss in a company can only be offset against the company’s other income. It cannot be passed through to reduce your personal income tax. In effect, the loss is “trapped” in the company until it generates enough taxable income to use it.
To avoid this, you can ask your accountant to model potential negative gearing losses over the first few years, comparing the impact of using the loss to offset personal income versus company income. Factor this into your decision on whether a company, trust or personal ownership best suits your investment strategy and tax position.
2. Finance and borrowing capacity implications
Lenders view company structures differently, which can directly affect your borrowing capacity and the loan terms you secure.
First, the company structure may require directors’ guarantees, which means that while the company owns the asset, the lender still has recourse to your personal assets – including your family home or other personal investments – if the company defaults.
Second, not all lenders offer mortgages to companies, which can narrow your pool of competitive finance options.
Third, there may be higher deposit requirements for companies, increasing your upfront costs.
While these challenges can make securing finance more difficult, it is not impossible if you’re working with an experienced mortgage broker like AXTON Finance. We understand the nuances of corporate lending and can structure the loan to suit the entity. We also clearly explain the implications of personal guarantees. Our job is to ensure your full financial picture is presented to the lender in the best possible light, helping you secure competitive rates and terms for your investment.
3. Land tax and state thresholds
In Victoria, stamp duty (Land Transfer Duty) and land tax are governed by state law. Your ownership structure can affect both..
Company purchases are subject to standard land transfer duty, and potentially landholder duty if there are later changes to the company’s ownership.
However, for land tax purposes in Victoria, companies are generally assessed at the same rates and thresholds as individual owners. It’s trusts – not companies – that face higher surcharge rates and different thresholds.
So, owning a property in a company won’t necessarily trigger higher land tax in Victoria, but holding it in a trust might. The rules also differ depending on whether the property is residential, commercial or industrial.
Because this area is highly technical and state-specific, it’s important to confirm the exact Victorian land transfer duty and land tax implications for the property type and location you’re targeting before settlement. That way, you avoid a nasty surprise bill after you commit to the purchase.
Making the strategic choice
For a time-poor professional in Melbourne investing, you want a structure that works smoothly, delivers tax-efficient returns and doesn’t require a full-time focus. Purchasing your investment property in a company name is one way to go, but there are some factors you should consider before making a final decision.
The trick is to engage the right professionals to help. Speak to your accountant and financial adviser about your current tax set-up and long-term financial goals. At AXTON Finance, we work with accountants, advisers and legal professionals to help you secure the right finance for your investment strategy, whether that's through a company, trust or personal ownership.
Important note: The tax and regulatory implications of buying property through a company, trust or in your personal name can vary significantly depending on the state or territory, the type of property, the value of the asset and your broader financial circumstances. Land tax thresholds, surcharge rates, landholder duty and eligibility for tax concessions like the capital gains tax discount are complex and can change over time.
Before deciding on a structure, speak with your accountant and legal adviser to understand the full tax, legal and financial implications – especially for your target state and property type. What’s appropriate for one investor may be costly or inefficient for another.
Ready to structure your next investment the right way? AXTON Finance can help you navigate the finance and ownership options that best suit your goals. We work with your accountant and adviser to secure competitive lending terms and ensure your investment performs from day one. Call 03 9939 7576, email getabetterrate@axtonfinance.com.au or get in touch today.