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Is buying property in a trust a good idea?

  • Using a trust to buy property can help families manage assets & distribute profits from property purchases
  • Legal & tax experts reveal the main benefits & pitfalls to watch out for
Couple looking at buying a property via family trust
Couple looking at buying a property via family trust

In our buying property through a family trust guide:

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What is a family trust?

A family trust is a legal arrangement that allows family members to manage their assets, commonly property or business assets. Family trusts are often established by parents who serve as trustees for their children (the beneficiaries). You can use a family trust to purchase an owner-occupier or investment property, with the trust holding the property for tax purposes (like a safety deposit box) and distributing the profits to its beneficiaries.

In family trusts, the trustees can choose how the trust’s income (e.g. rental income or profits from the sale of a property) is allocated to the beneficiaries. This ‘discretion’ is why family trusts are also called discretionary trusts. According to the Australian Taxation Office (ATO), discretionary trusts are the most common type of trust in Australia.

Features of a family trust:

  • The trustee (or trustees) can be a person or a company (corporate trustee)
  • The trustee can also be a beneficiary, but not the sole beneficiary, unless there are multiple trustees. This means you cannot set up a family trust to buy property only for yourself
  • Children under the age of 18 can be beneficiaries of a family trust (but may be subject to higher tax rates), according to the ATO
  • Different types of assets can be held in a trust, including land/property, shares, cash and other valuable assets (e.g. artworks, jewellery)
  • A trust requires a formal trust deed that outlines how the trust operates (including if benefits can be paid as a lump sum or income stream)
  • A trust should have its own tax file number (TFN) and/or an Australian business number (ABN) if it’s a company trust
  • In the case of an investment property, a trust can distribute income, but it cannot distribute losses to beneficiaries
  • The trustee is personally liable for the debts of the trust, including tax debts and loans
Legal paperwork for family trust

Buying property through a family trust vs as an individual

Buying property through a family trust is an alternative to buying a property as an individual or couple. Unlike individual ownership, where the property is in your name and you’re personally liable for the loan, a family trust (managed by the trustees) holds the property and applies for the loan on behalf of the beneficiaries. The trustee is the legal owner of the property in a family trust, but the property must be used only for the benefit of the beneficiaries. This is part of their legal obligation to act in the beneficiaries' best interests.

A family trust offers asset protection and tax planning benefits, but it also involves additional complexity compared to individual or joint property ownership.

How to buy property in a family trust

A common way to buy property in a family trust is by applying for a home loan (called a trust loan). The trustee(s) will generally submit a mortgage application with a lender on behalf of the family trust. The lender will then assess the trust’s financial position and creditworthiness, just as they would with an individual applying for a loan.

However, applying for a trust loan comes with some added complexity compared to applying for a standard home loan, because:

  1. A trust loan involves multiple parties, including trustees, beneficiaries & directors (if the trust is a company)
  2. Most lenders require all trustees and beneficiaries to be guarantors on the loan (therefore requiring more paperwork)
  3. A trust comes with its own set of financial documents, and a trust deed which lending specialists need to assess.

While securing a home loan through a family trust is possible, not all lenders provide financing for trusts. If they do, your loan request may be directed to their business banking or commercial division, according to Westpac. Eligibility requirements for trust loans also vary widely between lenders (e.g. Macquarie Bank accepts both family trusts & unit trusts). You may need to work with a broker who specialises in these types of loans.

How much can you borrow with a family trust?

Lenders see trust loans as riskier due to their complex legal structure. As a result, these loans usually have higher interest rates, and you might only be able to borrow up to 70-80% of the property's value, according to Westpac.

For a $600,000 property, if lenders only allow a 70-80% loan-to-value ratio (LVR) — what you borrow compared to the property's value — your borrowing capacity would fall within the range of $420,000 to $480,000.

Why buy property through a family trust? (4 benefits)

1. It can help save on tax by distributing income efficiently

From a tax perspective, beneficiaries of a family trust are taxed only on their share of the trust's net income. For property investments, trustees can allocate rental income and capital to beneficiaries in the most tax-effective way each financial year — usually by distributing funds to beneficiaries in lower tax brackets, typically spouses or children.

For example, suppose a trust earns $150,000 in rental income per year. In that case, the trustee(s) can allocate $75,000 each to two beneficiaries in lower tax brackets (e.g. 32.5% for income between $45,001 - $120,000 in Australia for the 2023-2024 tax year). This allocation reduces the overall tax liability compared to taxing the entire amount at a higher marginal rate of (e.g. 37% for income between $120,001 and $180,000). Trustees have to pay tax on any undistributed income and are responsible for lodging tax returns for the trust each financial year.

Amir Ishak

“Where the property generates a taxable loss, this can be either carried forward to offset positive trust income in future years or to offset trust income from other investment sources (e.g. shares) or trust capital gains for that year.”

Amir Ishak, Principal Adviser at Property Tax Specialists

2. Stamp duty exemption on transfer of ownership

According to the ATO, if you transfer an investment property from your name to a trust, you usually have to pay stamp duty (a tax on property transfers in Australia). You’ll generally also have to pay capital gains tax (which can be expensive if you’ve owned the property for less than 12 months).

“When transferring control of a discretionary trust to adult children who are beneficiaries, and if the trustee is a company, no stamp duty applies in some states since there's no change in the property title or beneficial ownership, as it remains under the corporate trustee's name,” according to Amir Ishak, from Property Tax Specialists.

There might also be an exemption from stamp duty when changing individual trustees if stamp duty has already been paid on all previous transactions involving the trust, such as when the property was first transferred into the trust, according to the ATO. The new trustee becomes the legal owner without paying additional stamp duty (this can vary between states). This change of trustee can happen if the current trustee retires or resigns.

3. It can simplify estate planning & profit distribution

A family trust can facilitate the transfer of property ownership in cases of death, disability, or illness. That’s because the trust deed sets out how the trustee(s) should proceed in such events, which can prevent family legal disputes.

Trusts also simplify the distribution of wealth from investment properties because legally, the trustee must act in the best interest of the beneficiaries.

4. It can protect your family assets from creditors

If any beneficiaries of the trust go bankrupt, the investment properties and other family assets in the trust might be safe from creditors. This is because the trustee legally owns the property and assets in the trust, not the beneficiaries.

So, in the event that a beneficiary who receives income from an investment property encounters financial hardship or legal issues, creditors would have no legal claim to that asset, according to LegalVision. This is one of the major advantages of owning property through a trust.

Amir Ishak

“It’s worth noting that nothing is 100% guaranteed to protect assets, as rules, regulations and case law evolve. Insolvency problems of individual beneficiaries generally should not impact the assets in the trust, however, family law matters like a divorce take priority, which may leave the trust exposed.”

Amir Ishak, Principal Adviser at Property Tax Specialists

What to watch out for when buying property in a trust

1. It can be expensive to set up

A family trust for the purpose of buying property can be costly to set up as it will generally require legal expertise. Based on some quotes obtained by Money.com.au, a family trust can cost between $3,000 to $5,000 (plus GST) to set up, depending on its structure and number of trustees and beneficiaries.

2. Negative gearing concessions don't apply to trusts

If you purchase an investment property through a family trust and it is negatively geared (i.e. expenses exceed income, resulting in a loss), you will not be able to claim a tax deduction against other income, unlike an individual investor.

Mark Chapman

“Where the property is negatively geared, this can be problematic because any loss remaining after other income has been taken into account is effectively ‘stuck’ in the trust. So, losses cannot be distributed to beneficiaries and it’s very difficult to carry them forward in the trust (there are various anti-avoidance provisions which can easily apply to trusts).”

Mark Chapman, Director of Tax Communication at H&R Block

3. Main residence CGT exemption doesn’t apply to trusts

Additionally, if the property is the main residence of a trust beneficiary instead of being rented out, the trust can’t claim the main residence exemption from CGT, which could lead to a nasty tax bill when the property is sold, according to Mark.

4. It may be harder to get finance for a property

Not all lenders offer home loan products to family trusts due to their complex legal structure and the limited liability of beneficiaries (they’re not personally responsible for the debts or obligations of the trust). The asset protection provided by the trust can make it more difficult for lenders to repossess the property if you default on the loan. Additionally, the lending process for trusts often involves more detailed documentation and stricter eligibility criteria, which can further deter some lenders.

How to apply for a home loan through a family trust

To apply for a home loan through a family trust:

  • Confirm that all trustees and beneficiaries meet the lender's requirements (e.g. guarantors must be over 18 years of age)
  • Complete the loan application form provided by the lender or broker, including detailed information about the trust and its financial position
  • Submit the trust’s income and identification documentation, including:
  1. A certified copy of the trust deed
  2. The trust’s TFN or ABN (if applicable)
  3. Financial statements & tax returns for the trust
  4. Identification documents for all trustees & beneficiaries
  • The lender will review the application, focusing on the financial stability and creditworthiness of all trustees party to the loan
  • If approved (subject to valuation of the property), review the loan agreement carefully — all required parties, including all trustees and beneficiaries must sign it.

Is buying property in a family trust a good idea?

Buying property in a family trust can be beneficial depending on your specific circumstances and goals. “The sophisticated family with some relative wealth often assists their children by way of family trusts and as part of their overall tax planning,” according to Barry Frakes, Principal Lawyer at Watts McCray.

However, setting up and maintaining a trust can be expensive, and getting a trust loan from the bank may be more challenging than securing a standard mortgage (lenders are typically more risk-averse to this type of finance).

The first step is to clarify your reasons for wanting to place a property in a family trust. Some questions to consider include:

  • Am I looking for asset protection, tax benefits or something else?
  • How does creating a family trust align with my broader financial and estate planning goals?
  • How flexible is a trust in accommodating changes to my financial situation or family structure?
  • Am I comfortable with the level of control I’ll retain or lose by placing the property in a trust? (Beneficiaries need to be comfortable with the trustee's ability to make decisions about the property.)

Next, consult a legal or financial professional to discuss the specific implications of your situation.

Types of trust available in Australia

Family trusts are usually discretionary trusts. Under this trust structure, the trustee(s) decide how the trust's income, like rent or profits from selling property, gets divided among the beneficiaries.

In a fixed trust, beneficiaries have a predetermined share of the trust's property/assets and are entitled to a specific portion of the trust's income, according to the ATO. This is usually done by dividing the trust into units, similar to how a company is divided into shares. A fixed or unit trust is often used for non-family ventures or when two separate families want to own an asset together.

This is a hybrid between a discretionary and fixed trust where trustees can choose how to distribute some of the trust's income and capital to the beneficiaries. But, the beneficiaries also have fixed income or capital entitlements during the financial year. Those fixed entitlements are typically dealt with via ‘special units’.

This type of trust is established under a valid will and only takes effect after the death of the person who made the will, according to the Public Trustee of South Australia. A testamentary trust is similar to a discretionary family trust. However, it operates under the provisions outlined in the deceased person's will (which becomes the trust deed). The deed (will) outlines how the deceased person's assets will be distributed to the beneficiaries.

This is a private superannuation fund that you manage yourself, but it works like a trust. A SMSF can have between one and six members, according to the ATO. Each member of the fund must be a trustee and can make decisions about how the superannuation is invested (including buying property).

Australia's Money Matchmaker matching you with your best loans across multiple lenders
Note, this is a guide containing general information only. Please seek personalised professional advice from a qualified advisor before making significant financial decisions.

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Written by

Megan Birot Money.com.au writer

Senior Finance Writer

Megan Birot

Reviewed by

Mansour Soltani home loan expert

Home Loans Expert

Mansour Soltani

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