Structuring Equity for Business Owners Investing in Property

Business owners often hold substantial value in their companies. Leveraging that equity for property investment can be an effective wealth-building strategy, but poor structuring can expose both personal and business assets to risk.

Key Structuring Considerations

1. Separate risk.

Keep business and personal property ownership distinct to protect against operational or legal liabilities.

2. Choose the right entity.

A holding company can own investment property while maintaining clean records.

A discretionary trust can offer protection and succession benefits but adds complexity.

Avoid cross-guarantees that tie property to business risk unless necessary.

3. Funding method.

Use shareholder loans or retained earnings to fund deposits, but consider timing and tax implications.

4. Tax treatment.

Understand depreciation, interest deductibility, and bright-line exposure under each ownership model.

5. Exit flexibility.

Plan ahead for refinancing, selling, or transferring ownership to avoid unnecessary tax costs.

Example Scenario:

A consulting business owner with $1.5 million in retained earnings wants to purchase a $2 million investment property.

Options include:

1. Lending the $1.5 million from the company to a property-holding entity and borrowing the balance from a bank.

2. Distributing profits as dividends to use personally for the purchase.

3. Using a mix of shareholder loans and personal capital for maximum flexibility.

Each option has different tax and risk outcomes, so professional advice is essential.

Advisory Best Practices:

1. Involve accountants, lawyers, and lenders from the start.

2. Model multiple funding and ownership scenarios.

3. Keep buffer capital in the property vehicle for safety.

4. Avoid excessive leverage that could harm business liquidity.

5. Incorporate estate and succession planning early.