Buying Property in a Trust

Buying Property in a Trust

What do you tell your client when they ask which vehicle is best for purchasing property? As with most situations, decisions will differ depending on individual circumstances. There will be pros and cons to both, and estate agencies may also have different opinions. Carol Reynolds, Pam Golding Properties’ area principal for Durban Coastal, says that generally the group encourages residential property buyers to purchase a primary residence in their personal capacity. Why? When it’s time to sell, there’s a R2m capital gains tax exemption. But Reynolds says for second and third properties that can’t be construed as primary residences, buying in a trust makes the most financial sense.

Trusts offer homeowners value in that they are well suited for asset protection and ring-fencing risk. Plus they can be passed on by generation to generation, bypassing estate duties. The trust can also be taxed in the hands of the beneficiaries, says Reynolds, which often results in a lower tax bracket for the parties, hence less tax liability.

But be aware, property can’t be bought in the name of a trust that is yet to be formed – the trust has to exist at the date of sale (It doesn’t take longer than a couple of weeks to register generally).

Bottom line, it’s best to get advice from an attorney or accountant before choosing the correct legal entity for a property purchase. SARS examines trusts with a fine toothcomb so they need to be managed diligently, particularly when it comes to ensuring that the trust is not deemed to be an “alter ego”, that is, simply an extension of the self in a contrived legal entity.

Reynolds says that most of the group’s sales transactions are concluded with individuals in their personal names, and trusts and companies account for a small percentage of sales. “Companies tend to be the preferred option for commercial property transactions, whereas trusts are used for both residential and commercial sales.”

 

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