Asking for a friend. They want to rent their property out to parents - what's the proper way to set this up? i.e. for the associated costs to be tax deductible etc.
Make sure the arrangement is a commerical one: 1. Charge market rent. 2. Have a lease agreement in place. 3. Have a property manager in place. 4. Have landlord insurance. If they do these sorts of things, the ATO will more likely see it as legit.
Make sure is a written lease. Make sure they actually pay. Leave a money trail in a bank account. I personally wouldn't use an agent but it may be a good idea
Make it a written lease and the rent paid is commercial Support the rent with evidence of market value Prove the rent is paid
If parents are on Centrelink benefits its important that you check with them too as rent assistance and support etc has some catches with related rental
Sometimes, family (and friends) make the worse tenants. We rented our very first IP to a good friend (and their family). We were inexperienced (this was about 25 years ago) - so we self-managed and offered the property slightly below market rent because they were GOOD friends (and they were doing it tough). After 8 years, they stopped paying rent. When questioned, they said they had paid enough. What!!!! We were too busy running our business. So, we appointed a PM. They got the tenants to vacate the property, got the tenants to pay the back rent (via a payment plan), increased the rent significantly, got new tenants, ... Still have that IP. Still have the same PM agency. All our IPs have PMs. Wouldn't think of doing it any other way. Don't have those tenants as good friends anymore. Don't even have them as friends. Something to consider ...
This is always my take, but I also know that it could work for others Sounds like the last 8 years they have built some unjustified resentment
No. We used to see them on a regular basis as they had two kids the same age as ours. It was a total surprise. Out of the blue, they just said they weren't going to pay any more rent. Interestingly, 25 years later, we understand (via a mutual friend) they are still renting.
It can work. It can also go bad. It can be more complicated if there are siblings as everyone has an opinion.... You can justify charging around 10%-15% below market rent if no PM and no vacancies to take into account. Ensure there is a written lease. And timely renewals. Have rent paid directly into your bank account to prove payment. Check with Centrelink if rent assistance is involved. As always, keep good records. And make sure everything is crystal clear from the outset. Who mows the lawn? Who weeds the gardens? Make sure it is understood the house is rented "as is". If parents want an improvement, I.e., air-con or dishwasher, who pays? You? Them? Go halves? The clearer the understanding the more chance of success. Also discuss the procedure for rental increases. If also giving money to parents keep the transactions entirely separate and preferably use different banks for gifts and rent. Possibly begin with a 12 month trial period, at the end of which either party terminate with no hard feelings? Marg
Just bear in mind that if you charge 15% less rent then the deductions need to be cut by 15%. IT 2167 - Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases (As at 4 July 1985) IMO never buy, sell, lease, transact with friends or relatives.
I'm not quite sure about the current arrangements, but I think they have good relationship, no siblings. The thinking behind it is to mainly also improve serviceability (they live in 2 different houses and want to buy another property to be closer)
Marg's comments remind me of a client who bought an investment property for his brother to live in. Times got tough and he had to sell the property, but the brother did not want to leave or for the proeprty to be sold and made it difficult to show prospective purchasers through. It was eventually sold, but at settlement there was damage found - aparently the brother had gone through and ripped out anything he had installed or put into the property - plants, watertanks etc. They had to give the purchasers a good discount in order to settle. To make matters worse the owner brother had cancer and was about to die. He cut the brother out of his will 1 month prior to him dying.
