tax implications for co-borrowers if house is rented on air bnb

Hi there

A couple of years ago I purchased a property which I now live in. At the time, my income was not high enough to take on the loan by myself, so 2 friends (a couple) offered to go on the loan and the title as co borowers. I am approaching the income required to take on the loan by myself and hope to do this next year. My question is that I am thinking about renting my house out on air bnb for 4 weeks over Xmas, as the house is a beachfront property and quite lucrative over this period. Will there be any tax implications for my friends? For me, down the track? I pay the entire mortgage, paid the deposit and all bills, repairs etc - my friends have no financial interest in the house. An accountant who did my last tax return said renting the house out as a holiday let is a 'red flag' to the tax department, which I don't understand. I would greatly appreciate some information and advice here. Thanks in advance.

 

Are you the only owner on the title? I am not sure if you bought out your mates.

Renting a holiday home and properly returning the income from rental (with relevant deductions) is a normal activity. It is not a concern to the ATO provided you show the income properly in your tax return.

 

Income tax on rental income is generally based on the title - ie ownership. If the friends were only co-borrowers there is no issue to be concerned with.

I agree with Ross.. declaring the income and relevant costs for that same period pose NO tax concern. Failing to declare it is the problem esp since AbnB is a hot focus for datamatching to tax returns. The one issue to take care of is land tax....What state ? If the unimproved land value is under threshold no issue but if its beachfront that may be unlikely....If its NSW Clause 8 of the PPOR exemption ruling might apply. Worth checking.

 

Yeah. I forgot about land tax issues.

 

Are your friends acting as trustees for you?

If not then your friends will be facing some tax issues. So might you. I don't think the 6 year rule could apply to short term absences because you are not really absent but just not there for a bit.

 

Hi there,
Thanks for your responses. Just to clarify, I am certainly going to declare any air bnb income, just want to know if / how it will affect my friends. They are on the mortgage and also had to go on the title for the loan to go through. The ownership split is me 60%, one friend 20% and the other friend 20%. (My friends are not trustees, just helping me out as co borrowers so I could get the loan - they are not interested in making money out of the house.) So does this mean if say I receive $2000 for rent through airbnb, my taxable income would be $1200 and they would have to declare $400 each? Even though, as I said - I pay all the bills, mortgage etc and I would be receiving the entire $2000? I was hoping to just put the $2000 in my account and pay tax on the $2000 and not involve my friends and complicate matters. The house is in Tasmania.
Also if I can earn enough this year to take the loan on my own and remove my friends from the mortgage and title, if the property is valued higher than when we bought the house 2 years ago, will they have to pay tax? Say the bank valuation says the house has increased by $50k, does it work that by removing their names off the title, they are in effect 'selling' me their share and making a profit of $10k each on their 20% ownership. This has just occured to me and as one of them would be in the top tax bracket and I don't want their generosity in helping me cost them in any way, I would need to give this person about $5k towards their tax bill?
Appreciate any help here, as this prospect is doing my head in! Thanks.

 

Yes they will pay tax on their portion of the income (after expenses). It doesn't matter that you are taking the income and they are not receiving it directly.

Yes when the house is sold or transferred to you they will pay CGT on the disposal of their share - no main residence exemption for them as they are not living in the property. Stamp duty would be payable by you too.

 

In the absence of any written agreement/s (often a form of partnership agreement) between you all then the title is the basis for taxation of income and capital gains. I have seen instances where a party is on title and acknowledges and accepts in writing that they seek no share of income or capital gain and are solely on title for loan purposes as a requirement of a lender. Alternatively some lawyers may establish the other parties interest as a trust so that their interest is held on trust for ..you. This is often a family arrangement as banks now seem to have an aversion to guarantors and ask for parties to be on title to get approval over the line. In that instance a private ruling from the ATO might be sensible to confirm their acceptance of that.

Your friends really should have obtained legal advice before entering into the arrangement.

 

Thanks for the replies. Yes we all should probably have obtained legal advice. It was supposed to be just their names on the mortgage, but as you said Paul, the bank wanted their names on the title as well. So, on the basis of the above advice, I won't put the house on air bnb and will be looking to remove their names from the title & mortgage asap. Paul, do you know if it is possible to draw up a partnership agreement now, or would that have to have been done at the time of purchase? I will call the ATO for assistance with this. Thanks very much to all those who replied - I appreciate your time & expertise.

 

The ATO wont advise or assist or likely even discuss a partnership agreement. Dont waste their time. Terry may be able to assist you draft that and if I were you I would advise the ATO when you seek a private ruling that the written terms of the partnership agreement were committed to a written agreement after the property contract and settlement for clarity. of the verbal agreement made earlier.

The ATO may (or may not ?) then agree that the other parties had no equitable interest in the property.

 

Would taking someones name of a title incure stamp duty/CGT event? Is it essentially the same as selling/buying out? If so, this could be a can of worms, how would you now "prove" ownership percentages when removing the names?

EDITED to add:- When I say "you", I'm not specifically addressing the OP, just a general thought as I read the thread.

 

Yes transfer of title is both a CGT event and a dutiable transaction - but different for some trust transactions. If you are not on title you are not a legal owner.

 

Ownership interests may be evident in the title (eg joint tenancy etc) or it may be necessary to refer to some other document eg a trust deed. A title isnt evidence of ownership. This is same as car rego. A car can be registered in a name and not be the owner. Or there is a person with a better claim to title eg loan secured over the car as security.

The duty / tax depends on reasons. I have seen names on title removed - no duty no CGT. It depends upon the capacity in which the legal owner holds the title !! Good example is evident in a unit trust. The legal owner may be ABC Pty Ltd (trustee co). The unitholder is Fred. ABC Pty Ltd doesnt beneficially own a thing. Fred has a beneficial ïnterest in the trust. If ABC Pty Ltd operates a unrelated newsagency and loses $ the creditors may struggle to access the property. If the Trustee was to offer the security to the creditor Fred may sue.

SMSF borrowings display many of these characteristics. A Company ABC Properties Pty Ltd may be the legal owner but on a bare trust for ABC SMSF. SMSF may pay some of he $ and bank loan comprises balance. When loan is discharged in full ABC Properties PL may transfer title to the fund and there is no CGT event and no transfer duty.

This area is one for legal advice from a duty specialist.