Buying a property involves more than just assessing the investment itself. How you make the purchase is also worth thinking about. Before choosing any entity, it is crucial to understand the differences of different ownership entities, and the advantages and disadvantages of each. This article will discuss pros and cons of buying as an individual, trust, company and limited partnership.

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Buying Property as an Individual

The most common way people buy a property in New Zealand is as an individual. This also includes purchasing with your spouse or partner, as both of your names will be recorded on the loan documentation and record of title. 

The main advantage of purchasing a property as an individual is simplicity. Obtaining finance and completing the loan process is easier and has fewer fees. As an individual, you also have more control over the property compared to other ownership structures. 

The disadvantage of owning property in your own name is that creditors may have the ability to make a claim over your property where you owe them money. This may be particularly relevant if you own a business, have provided personal guarantees and the business runs into issues paying debts when they are due.  

If you are buying the property as an individual with other people (for example your spouse, partner, other family members or friends) then you should also consider if the property will be held as ‘joint tenants’ or as ‘tenants in common’. The difference between the two ownership structures is summarised below.

• Joint tenants: In this ownership structure, all of the owners hold an equal share of the property and have an equal right to use and enjoy the property. If one of the joint tenants dies, their share of the property automatically passes to the surviving joint tenants. This is known as the ‘right of survivorship’. This means that the deceased person's share of the property does not form part of their estate and is not subject to the terms of their will. It is most common to use this ownership structure with couples in relationships, for example a husband and wife. 

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• Tenants in common: In this type of ownership structure, each of the owners holds a specific share of the property. This share can be different from the other owners' shares, and it will be specified on the property's record of title. For example, three friends (let's call them Elle Woods, Dennis Denuto and Mick Haller) decide to buy a commercial property together. Elle Woods is particularly flush after winning a recent legal battle and she contributes half the purchase price while Dennis Denuto and Mick Haller split the other half of the property together. To recognise the ownership shares as tenants in common, the record of title would show that Elle Woods owns ½ share while Dennis Denuto owns ¼ share and Mick Haller owns ¼ share. If one of the tenants in common dies, their share of the property does not automatically pass to the surviving tenants in common. Instead, it forms part of the deceased’s estate and is subject to the terms of their will.

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Trust

Another common method of purchasing a property is through a trust. A trust is a legal entity that allows a group of individuals to hold property and assets for the benefit of others. When you purchase a property under a trust, you won’t own the property yourself; the trust will. The trustees will be the registered owners on the record of title on behalf of the trust. The trustees are required to deal with the trust property in accordance with the trust deed and in the best interest of the beneficiaries of a trust.

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Owning a property in a trust can be useful for:

1. Asset protection: Trusts can provide protection for assets from creditors, lawsuits, and other legal claims.
2. Tax benefits: Trusts can be structured to minimise tax liabilities and maximise tax savings. Involving an accountant to assist with analysis of tax savings is helpful.
3. Estate planning: Trusts can be used to transfer assets to future generations while minimising the impact of taxes and probate costs.
4. Confidentiality: Trusts can be structured to maintain the confidentiality of assets and the identity of beneficiaries.
5. Flexibility: Trusts can be structured to meet the specific needs of the beneficiaries, and can be modified as those needs change over time.

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However, there are some disadvantages to buying a property under a trust. There is complexity around set up and administration of a trust entity (for example keeping records and required ongoing reporting). In addition, unlike individual ownership, with a trust you may have less control over the property as decisions must be made collectively and in accordance with the trust deed. 

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Company

If you purchase property under a company structure, the main benefit is that the company is a separate legal entity from yourself. This means the property will be protected from debts you might personally owe. There may also be tax benefits which you are able to realise in comparison to individual tax rates (note companies are taxed at 28% in New Zealand) and there is also the ability to claim depreciation on assets.  Changes to property entitlement can also be effected through changing the shareholding of the company which has benefits where there are multiple owners and entities involved. Purchasing through a company also provides a layer of anonymity which provides privacy to owners.

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If you want to set up a new company specifically for the purchase, it can take time to have it incorporated on the Companies Register and an IRD number issued. In addition, any decisions relating to the property may be subject to the company shareholder agreement, and will likely require the approval of company directors. 

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Limited Partnership

When purchasing a property under a limited partnership the main benefit is that multiple investors are able to pool their resources, which can make it easier to purchase larger assets. Limited partners will also benefit from limited liability which means their personal assets are protected in the event that the limited partnership faces financial difficulty. In New Zealand, limited partnerships can enjoy tax benefits such as the ability to pass through income and losses to the individual partners. 

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The downside to a limited partnership is that if you are an investor (and therefore a limited partner as opposed to the general partner) then you have restricted control and operation of the property. In addition, there is often a loss of liquidity as limited partners may not be able to easily sell their interests in the property or access the funds invested, which can limit the ability to meet financial obligations. 
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Key Takeaways

The ownership structure of a property purchase may not be one of the first things that comes to mind when considering an investment, but can have a significant impact on the financial return and the way it’s managed. 

Take the time to weigh up your options and priorities, as each option has its pros and cons. It pays to get expert advice that can account for your specific circumstances.

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