There are two ways you can structure your property portfolio - in a Property Trust or a Company with the company ’ s shares held in a Holdings Trust .
You might notice we didn ’ t mention having properties in your name , and here ’ s why . A trust protects your assets and makes estate planning a lot easier . It is so important to have an entity own your properties and not own them in your personal capacity because :
- You don ’ t want any assets in your name ( for asset protection and estate planning ) - You don ’ t want any large amounts of debts in your name ( the more debt you have in your personal capacity , the more difficult it becomes to build your property portfolio further ), and - The tax benefits are significantly better if you structure your properties correctly ( the conduit principle in trusts or the lower income tax rates on companies ).
But what do you do when you already own a property or multiple properties in your name ? Should you restructure your property investment portfolio or not ?
The short answer is yes . While restructuring can become expensive , it is necessary because the longer you delay , the bigger your problem will become and the higher your costs .
There are THREE MAIN ADVANTAGES to restructuring your property portfolio . Firstly , you get the assets out of your name , which means better asset protection and estate planning . Secondly , you get the debt out of your name , which means a cleaner credit record and increased ability to build a bigger property portfolio . Lastly , you get to finance the properties at their new market values in the acquiring entity , making plenty of capital available through the restructuring .
A bonus is that you can use these funds as reserves or to expand your property portfolio further ( of course , within the correct structure moving forward ).
Keep in mind that restructuring means you will need to incur transfer fees and new bond registration costs . However , these fees are reasonable for properties below R1 million and where there are not too much capital gains .
Unfortunately , transfer duties apply for properties valued at over R1 million , increasing the costs . Also , when there are significant capital gains , you ’ ll have to look at the capital gains implications of moving your properties over to the correct structure .
Note : If you are selling your primary residence to your structure , the first R2 million capital gain is exempted . To reduce your capital gains taxes , you can also utilise the
R40,000 capital gains tax exemption per year per person .
SA Real Estate Investor Magazine MARCH 2022 29