Airbnb investment: purchasing property personally vs. through an entity

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Airbnb investment: purchasing property personally vs. through an entity

Purchasing a property for short-term lets is a big financial decision. You need to consider the price,  location, maintenance requirements, and the list goes on. Often a secondary consideration, the ownership structure of your property is also vitally important. Whether you choose to buy the property in your own name or via an entity like a company or trust, your choice will have different implications for tax. Which ownership structure you choose will depend on your specific scenario so you will need to seek professional advice.

Below we discuss some of the ownership options and the implications from a tax perspective. 

There are several ownership structures you can choose to own your property including:

  • In your own name
  • Jointly held with another person(s)
  • Via a registered partnership
  • Via a trust
  • Via a company

Owning a short-term let property in your own name

Ownership in your own name often seems like the simplest option. Compliance costs like accounting or legal fees are lower than for other entity structures, and from an income tax perspective, all profits and losses are made by you, including any capital gains.

There are some potential snags however for this ownership structure in relation to GST. If you are not GST registered but you have self employed income under the GST threshold of $60k in any 12 month period and you buy a property in your own name, the airbnb income may push your income from the two sources over $60,000 and require you to register for GST on all activities. For example, if your self-employed income is $50k per year (under the GST registration threshold) but your short-term let income is $20k per year, your total income will now be $70k per year and you will be required to register for GST. Keep in mind the GST registration threshold is based on turnover – not profit – so you’ll need to keep a close eye on your upcoming bookings to ensure you register for GST when you cross the threshold or you may decide to manage your bookings to keep your turnover under that $60k threshold to avoid GST registration.

If you are GST registered in your own name for your self-employment then your airbnb activities will also be subject to GST. Bringing the airbnb property into the GST net means you’ll be able to claim the GST on the purchase of the property to the extent that it is used for your GST activity however you will also be required to pay GST on your airbnb income and on the sale price of your property when it is eventually sold or on the market value when you stop using it for a GST activity. Since property prices generally go up over time, it is likely that you will have to pay more GST on the sale of your property than you claimed on the purchase of it. If you use the property for personal use as well as for short-term lets, you’ll be required to make adjustments every year for 10 years to the GST claimed on the purchase of the property and possibly on the related expenses. You also may be required to make an adjustment if there is a permanent change to the use of the property. The accounting for this is complex so complying with the law requires input from an expert. 

Owning a short-term let via a company

Another ownership structure which is considered often is a company. Ownership via a company offers the protection of limited liability and you can avoid some of the GST issues from above. 

Assuming the company has no other activities, ownership via a company means you will not be forced to register for GST if the airbnb activities bring in less than $60k, even if you are GST registered yourself. 

If your company is registered for GST and you use the property privately from time to time you will be required to pay GST on the market rate for the accommodation for the nights that you stay. Because you are paying GST to use the property, there are no private use adjustments required for GST purposes (there will be for income tax under the Mixed Use Asset Rules).

Whilst owning a short-term let via a company appears to be simpler for GST purposes, a company also has its own pitfalls. Capital gains that are not covered by the brightline test are generally tax-free but can only be accessed by shareholders on liquidation of the company. This means that if you own several properties through the same company, and you sell one property for a gain, you will not be able to take those funds tax free to pay off your own mortgage, the gains will need to stay in the company until all of the properties are sold and the company is liquidated (note that Look Through Companies are different, see below).

Companies also come with their own set of administrative burdens. These include maintaining corporate records, filing annual returns, and adhering to additional compliance requirements. 

Other Ownership Structures: Trusts, LTCs, and Partnerships

Given the limitations of owning an airbnb property through a traditional company, you might consider alternative structures such as a trust, Look-Through Company (LTC), or even a partnership. Each of these options offers unique advantages:

Trusts

Trusts can provide significant tax planning flexibility and asset protection benefits. Income from the property can be distributed among beneficiaries in a tax-efficient manner, potentially reducing the overall tax paid. Additionally, trusts offer asset protection, as the property is held by the trust rather than an individual or company, shielding it from personal creditors. However, compliance costs for trusts are usually quite high as you’ll need to involve lawyers and accountants to ensure you are meeting your obligations. Trusts are now subject to income tax at 39% to the extent that retain income in the trust (i.e. do not distribute the income to beneficiaries).

Look-Through Companies (LTCs)

LTCs offer the benefits of limited liability while allowing profits and losses to be passed through to the shareholders, similar to a partnership. This pass-through taxation means you do not need to liquidate the company in order to access any capital gains made, however it also means there is no flexibility in the allocation of income from an LTC like you may have under a normal company, where there is the option to retain income in the company or to distribute to shareholders as a dividend, or a trust, where in addition to the option to retain as trustee income or distribute, there is an option to choose which specific beneficiary the trustees want to allocate the income to.

Partnerships

Although this structure in our experience is not used very often, a partnership can be simpler and more cost-effective than forming a company or trust, while still offering some benefits in terms of liability and tax planning. In order to own a property via a registered partnership, rather than owning it jointly in your own names, you’ll need a partnership agreement and a specific IRD number for the entity.

Conclusion

Deciding whether to buy an airbnb property in your own name or through an entity is a crucial decision that depends on various factors, including your financial goals, risk tolerance, and tax situation. While owning through an entity can offer significant tax benefits and liability protection, it also comes with potential downsides such as complicated capital gains tax treatment and additional administrative costs.

Exploring structures like trusts, LTCs, and partnerships can combine the benefits of limited liability and tax efficiency without some of the drawbacks associated with traditional companies or personal ownership. Consulting with a tax professional can help you determine the best ownership structure for you. If you would like some advice specific to your situation, please get in touch with us.

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