Tax on investment property - no rent

Discussion in 'Accounting & Tax' started by Investor_84, 24th Jun, 2018.

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  1. Investor_84

    Investor_84 Well-Known Member

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    Hi,

    I moved out of my family home that was my principle place of residence, I am also the owner of the property.

    When I moved out 3 years ago, I moved in to my own place and the family home is now effectively an investment property. However since it is my family and we are in a complex situation where they cannot afford to pay rent, I have out of good will allowed them to live there rent free. I am however paying interest on the property but half the loan is paid off as several of my siblings helped pay down half the loan before I moved out. So now I’m only paying interest only on the other half. There is no written agreement, we just help each other out and they have put a lot of trust in me that when we sell the property after mum passes away that I will give them their share back.

    Question I had from a tax perspective is can I claim the interest and any expenses on the property even though I do not get any rent? I’ve been to two accountants, one says even though you don’t get any rent the ato still need me to work out “market value” rent, so effectively I’m paying tax on income I don’t get. The other accountant says although my case is rare, if I genuinely am not getting any rent then I don’t need to declare any rent even “market value” rent.

    Does anyone have advice on this? I really don’t want to pay tax on my family home on top of what I am already paying for interest, expenses etc.
     
    Last edited: 24th Jun, 2018
  2. thatbum

    thatbum Well-Known Member

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    There's so much in this paragraph that doesn't make any sense.

    Firstly the answers you've gotten aren't even to the question you originally asked...
     
  3. Mike A

    Mike A Well-Known Member

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    Dont know why the first accountant said you had to charge market rent. Free consultation maybe. Advice was as valuable as the fee. Worthless. You dont need to charge anything.

    Then question is if you dont charge anything will the expenses be tax deductible. No.

    You have a bare trust arrangement going on here as well so any monies you receive from your family to pay down debt should be documented. Otherwise you may well have to argue what those amounts are for. Gifts ? Loans ? Contributions from beneficiaries ? Assessable income ? Who knows without evidence.

    This isnt your family home. It is a home held on trust for you and others. You wont get the main residence exemption on their portions when you sell either.

    I think your bigger issue is that you havent documented the arrangement. are you married or in a defacto ? Are any of your siblings married or defacto ? I hope not. Hope none of them die either. You might find "your home" being subject to huge legal disputes.
     
    Last edited: 24th Jun, 2018
  4. Investor_84

    Investor_84 Well-Known Member

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    While I was living at the family home before I moved out, family members would collectively help me pay down debt. We kept it in a spreadsheet so one day when we sell the place everyone takes their share.

    Ever since I moved out no one is paying down debt anymore. So I’m paying the interest on the remaining debt.
     
  5. Trainee

    Trainee Well-Known Member

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    If you have a partner and you break up, that spreadsheet doesnt mean anything. And your mum probably has no legal rights to live in the house.

    You need a lawyer to draw up some loan documents at least, maybe put a caveat on the property, and make sure your will includes all these things.

    The other thing to explain to your family is that youll have to pay cgt when you sell.

    Is it another can of worms to ask why the family home is in your name?
     
  6. Mike A

    Mike A Well-Known Member

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    Even worse trainee. One of the siblings dies and leaves their assets to their 22 year old son. The son is entitled to his share of that asset held on trust for the dead sibling. Time to sell up investor-84
     
  7. Investor_84

    Investor_84 Well-Known Member

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    I am married and I have a will set up that if I die before my mum, she gets half the house as my siblings and my mum has effectively paid off half the loan. Most of what my siblings have put in my mum has almost paid them back.

    My concern was more around tax. So if I don’t get any rent I can’t Calum losses on interest expenses etc right?

    It’s a situation I never wanted to be in but we had a very unfortunate family situation which has led to this.
     
  8. Trainee

    Trainee Well-Known Member

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    Is it a trust though? Wouldnt it be a loan to pay off the ops debt?
     
  9. Mike A

    Mike A Well-Known Member

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    So your mum has a life tenancy arrangement ?
     
  10. Investor_84

    Investor_84 Well-Known Member

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    No trust. Just a standard homeloan with half of it due but as interest only.
     
  11. Investor_84

    Investor_84 Well-Known Member

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    Pretty much yea.
     
  12. Mike A

    Mike A Well-Known Member

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    Sounds like a bare trust to me. 50% of asset held by him and 50% held by him as trustee for the others who contributed. @Terry_w will confirm.
     
  13. Investor_84

    Investor_84 Well-Known Member

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    Oh ok sorry I thought you meant if a trust has been set up. If this situation is a trust then I guess it is.
     
  14. Mike A

    Mike A Well-Known Member

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  15. Trainee

    Trainee Well-Known Member

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    So what if your spouse needs to sell their half to live on and your mum doesnt want to move out?

    Probably not as no income.
     
  16. Trainee

    Trainee Well-Known Member

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    This is not something you want to use the words thought and guess with.
     
  17. Mike A

    Mike A Well-Known Member

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    Or you get divorced and you need to sell the asset and you dont have a life tenancy agreement in place.
     
  18. wylie

    wylie Moderator Staff Member

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    Oh my... sounds very messy. I'd be getting something documented immediately to at least try to cover some of the scenarios that could arise.

    And a friend of mine has her mother-in-law living in a house her husband owns. She pays very low rent, but they have to treat it as if she is paying market rent, according to their accountant.
     
  19. Mike A

    Mike A Well-Known Member

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    Her accountant is wrong. The ATO has issued rulings saying how to treat expenses where the rate is less than market.

    If her accountant is treating it is as though they received market rent to get full deductions he has asissted the clients in defrauding the commonwealth. At least she can sue him.

    Read this says nothing about market rent it talks about less than market

    Legal Database

    Even then kowels case says that the expenses might not be fully deductible even where commercial rent is paid. Best she get their advice in writing and why the accountant disagrees with the kowel or groser case.

    And to expand

    In the Kowal case, for example, the Court found that the taxpayer had two purposes or objects in mind in acquiring the relevant property. One was to provide his mother with a good home at moderate cost. The other was to earn assessable income. The Court further found that the second purpose or object was the predominant one and, in the result, allowed income deductions for 80% of the losses and outgoings falling within sub-sections 51(1) and 67(1).

    In the Groser case, on the other hand, the Court expressed the view that, if the weekly rental had been assessable income, it would have allowed no more than $104 by way of deduction under sub-section 51(1) - the reason for this being that private or domestic purposes for the expenditure predominated over the purpose of producing assessable income.
     
    Last edited: 24th Jun, 2018
  20. wylie

    wylie Moderator Staff Member

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    Interesting...This was many years ago so perhaps I either misunderstood what she told me or their accountant is wrong.
     

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