By Westcourt Blogger
Families in business will often buy property across generations or between siblings. It might be an acquisition of a new farm or just a way to give the next generation a hand up into the property market.
These are the top 11 things to think about before you do it.
- Buy it as tenants in common
If you want a clean ownership of the property tenants in common is often the way to go. If you buy as a joint tenant then on death the property will go to the surviving property holder and not according to the will.
- The tax deductions follow the ownership
If you own a property with a couple of different family members the tax deductions and the income for the property will follow the ownership percentage. So simply banking the income into the bank account of one owner does not mean that owner will pay the tax.
Likewise if an owner pays for all of the maintenance costs they will only enjoy their relative ownership percentage as a tax deduction.
- The mortgage follows the deepest pockets
A mortgage over the property does not mean that an owner is liable only for their share. Normally a bank will pursue the owner with the deepest pockets to pay the 100% of the mortgage when times go bad.
If you want to limit your exposure to your ownership percentage you will need to get it sorted in advance with the tax structuring or loan structuring. Typically loan structuring and tax structuring go hand in hand so get your advisor and broker to talk and document what they are doing.
- Keep the family members to a minimum
The more people you include in the ownership group the more opportunities for arguments.
Try and keep the different direct owners to 2 or 3 people who control their respective family groups. Each ownership group can be a different section of the family – but only one member of that family branch should be represented.
- Look at the bigger tax picture
Think about all taxes like land tax, stamp duty, first home owner grants and superannuation when it are structuring the deal.
These extra taxes and benefits can sound small at first but quickly add up a lifetime so make sure your advisor documents these in their initial advice. And if you think combine some simple strategies in a smart way you can get a great outcome for your family.
- Create an exit strategy
Despite the best of intentions things can change. Family members can go bankrupt, die, get divorced or simply need access to the equity in the property before the specified exit point.
Have a clear and defined pathway to allow family members to exit or deal with the asset if the future changes or you die.
- Define your obligations
It takes a lot of work to manage a property. Somebody has to pay rates, check maintenance, attend to taxation, talk to real estate agents, interview tenants and go to body corporate meetings.
If the jobs are to be done by certain people than those people should have a job title and a job description.
Importantly those people who do the work should be paid for what they do – at market rates.
- Plan for poor behaviour
Despite the best of intentions family members might not act as promised. Jobs might not be done, financial contributions might not happen and some people might not act in a way that helps the ownership group.
Have a clear documented strategy to correct poor behaviour. This could be a simple reduction of a paid salary position to a forced exit.
If you have the outcomes planned in advance for bad behaviour; you stand a better chance of maintaining the family harmony when you apply (but not guaranteed sadly).
- Forecast financial outcomes
When you are buying a property the emotions can run high and expectations for the future can be bright.
Do a forecast with bad numbers included. And think about how the different owners will act if the deal is not going as well as everybody expects.
When that is done consider the financial capacity for each member to contribute for those bad times.
If a family members cannot step up to help in the bad times they should not be there. Period. Otherwise the deal is a hand-out (not a hand-up). That is fine but everybody should acknowledge what was happening straight up.
- Talk about what you are doing
Let the extended family know what is going on and how different people have contributed to the property. And if you are giving a family member a hand up – let everybody else know about it know and explain the position now.
The good families we help who run great businesses have a clear and formal process of making sure the extended family are kept abreast of what is going on and why (typically with an independent advisor).
- Write it down
Despite the best of intentions people’s memories change. Write down everything about the deal and how it will work. Starting off at why the structure for the ownership was chosen, how people will be liable for certain debts, exit clauses and obligations for different people.
Even when you run the quarterly, 6 monthly or yearly family council meeting – take minutes about the property and what is discussed.
If it’s written down it helps the memories.
The most important thing to acknowledge is that every property deal involves a large amount of money. Time should be invested up to give respect to the amount of money proposed. If you talk and plan these things with care, and document them for the future: then your proposed property investment can make a significant contribution to current and future generations.
If the documentation part is not your strength then simply get your accountant who is focussed on family businesses to help you. If accountant is well versed in family owned business the engagement might be a simple pointer on what to consider, or a review of your proposed strategy, write down to documenting the entire process for larger deals.
Whatever way you choose to engage your family business advisor – the insight and extra angles to consider will generate dividends for you later on.
