Convert PPOR to IP, rent out to parents

Hi all,

Looking for general tips on a scenario.
I live in a house with my retired parents (whose title and loans are under my name), and want to move into an IP (also mine) to make it my principle residency. The current home is to be converted into an IP by "renting" it out to my parents.

What considerations and pitfalls should be taken into account, considering all properties are in my name? Please link to any existing threads - had a search but couldn't find a similiar scenario other than one advising don't mix personal with business by renting to friends.

Thanks

 

You need to charge market rent, have a lease, lodge the bond at the minimum. If you want to be able to claim interest and repairs etc I'd go as far as getting an agent to manage it so it's more arms length...

 

Another thread:
Renting to Parents

 

Is there any trust relationship? Is it their property or yours?

ASsuming no trust then you can treat it is 2 ways:
a) arms length arrangement treating them as if you would treat a stranger tenant. Market rent and claim everythign as per normal.

b) undermarket rent with your claims cost costs being limited - generally to the rent received.

Also consider the main residence CGT exemption, land tax, and estate planning - centrelink too possibly.

 

I have seen it just once.

Taxpayers came to me claimed he rented to parents and the ATO had sought evidence of the date they commenced to reside. They were reviewing the bonafide nature of the arrangement. The property costs etc indicated they lived there prior to the actual lease date. ATO suggested that occurred. Denied deductions in full as a private arrangement. They talked of a trust or private arrangement. The audit decision said the new recent lease was contrived to obtain a tax benefit and absence of past rent payments supported a private arrangement and that rent is now contrived. A bit like inventing a loan document after the event and being unable to prove rents were paid both after the lease and before. Penalties were discussed but dropped. Never went to objection.

 

I've seen this break families apart before with colleagues of mine. What happens when you wish to increase the rent to match the market rate and they claim they can't afford it... or it's too much. I've seen parents of my friends request things like a new air conditioner or cooktop when the current ones work just fine. Difficult to keep this strictly business when it's personal. I'm not saying you will have these issues but it's something to consider.

 

One of the common mistakes is going "upside down" in finance. Moving out of a PPoR with a relatively small mortgage (if it's been paid off over a period of time) and converting into an IP and then moving into a property with a larger mortgage. The original PPoR 'small mortgage' is now tax deductible but the new 'big' mortgage is not so you're upside down with respect to tax deductions on the interest payments.

Obviously every case is different but often it's best to sell, take the proceeds and fund a new PPoR and then re-gear back into an IP. Yes, there are transaction costs but depending on your holding period and tax bracket, these can be offset relatively quickly.

 

Thanks everyone for your input. Treating it as a normal rental situation sounds like the way to go, even bringing in a PM as an extra barrier. Probably the easiest $1500/yr in management fees for that agency.

@Andrew Hancock, good call out on being inverted with tax deductible loan size.

 

I would not do this in normal circumstances even with a PM

 

Can you please elaborate on the risks you see with this, or any ideas?
Still want to keep my parents living there and not have 2 PPORs in my name.

 

I just like to keep money and family/friends separate. Has the potential to get really messy

 

Why do this ? They can rent anywhere and you can have tenants you can treat as such.

Make sur you give advance notice before you visit, otherwise they can corner you or tax dept may use such things to say it is not legit.

Surely you have friends wit IPs ? You could swap parents......errr tenants.

 

Looking to do this so I can move out and live elsewhere, without relocating my parents. Seems kind of extreme to evict my parents from our home, ask them to go find a rental and also find tenants to occupy a furnished home.

Got around to reading EN710's similiar post... I think I have a good starting point - charge market rent (which I'll hand them in cash and they can return to me via bank transfer), get a lease, pay bond. Claim appropriate IP deductions at tax time. Should be fine I reckon.

 

A work assosiate is facing a similar problem.
His father wants to downsize, but doesnt have the equity......
Luke wants a house, but doesnt have servicability........

So Luke is thinking he can afford to buy a unit his father can live in, while Luke goes and lives in his fathers house.

Could they effectively rent off each other for the same amount?
Suggestions

 

Possibly. But it would be necessary for each rent to be at market price, unlikely unless the property values are very similar. Sounds as if the house is worth more than the unit as far as rental price goes.

And unless Luke is an only child, this can cause family difficulties.

The real risk is how the ATO views it.
Marg