Joined at the slip: purchasing property through joint ventures

03/04/2012


Question: I’m want to buy an investment property with two good friends of mine so we’re thinking of setting up a Joint Venture (JV) arrangement. Can you please advise on the best way to establish a JV trust? What should I know before I commit? 

Answer: First of all, the obvious: buying property with friends can be fraught with danger. Having said that, the main thing to watch out for is how to get your money out. Issues include: what if someone is paying extra (deposit, etc) or spending more time than the others – how do they get a better return? How are major repairs paid for, what about future renovations, what is the exit strategy and how will property be valued? Can you refinance, how will funds be distributed and in what proportions, will loans be joint and severable or severable only, etc? 

We often see one party wanting to exit and the other not (are profits distributed differently if someone exits outside of agreed terms?) so buying in your individual names would trigger stamp duty and capital gains tax (CGT). If you buy in a trust, then you avoid stamp duty (except maybe in Queensland). 

Buying in a trust has land tax implications, especially in NSW, and depending on your objectives (buy and hold versus trade), different trusts would be contemplated. The above list is nowhere near exhaustive but shows a sample of issues which you should consider. 

When purchasing together with others – either individually or in a trust – we would recommend you seek legal advice and enter into a formal and detailed agreement, setting out the terms and conditions including roles and responsibilities of each party, and include an exit strategy.

Answer provided by Ken Raiss, Chan & Naylor Accountants (www.chan-naylor.com.au)

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