Converting own home to IP and living in it

[WebBoard]

From: Anonymous


Hi,

I am another newbie looking for advice, amongst what I can see is a tonne of seasoned professionals.

We purchased our current terraced home in May 95 and had it gutted and rebuilt between July 98 and April 99. The original intention was to sell the property upon completion (or within 6 months of completion). Unfortunately, due to spiralling costs, compliments of the Olympics and an uncaring builder, the cost of rebuilding has blown the original profit expectations. The house is situated very close to the CBD, in a medium to high growth area. It would seem to make sense to continue to live in the property, especially as it is now very comfortable and spacious, until the value has caught up with our original profit expectations. However, while we wait, we will not receive any tax benefits (and we definitely need them) and the large amount of depreciation deductions on this property will be wasted. I have toyed with the idea of renting out the property, while we rent someplace else, but it would be hard to find a rental property around this area which is affordable and we could also end up with the Tenants from Hell. I see the way round this dilemma, would be to find some way to declare our current home as an IP, pay a market rent, but be able to claim the tax benefits. If we get the tax benefits on this property, we will be able to afford to risk buying an IP, whereas at the moment we have an 80% mortgage which is just about manageable.

Any suggestions as to whether/how this can be done legally?

Thanks in advance.

FCB

 

[duncan_m]

Reply: 1
From: Duncan M


You may wish to review this case:

http://law.ato.gov.au/atolaw/view.htm?basic=redman&&docid=JUD/17ATR1007/00001

and

http://law.ato.gov.au/atolaw/view.htm?basic=redman&&docid=JUD/19ATR254/00003

and

http://law.ato.gov.au/atolaw/view.htm?basic=redman&&docid=JUD/19ATR254/00001

If you cant follow it, its not for you.. Given you've already purchased the home, I'd say the answer to your question is an emphatic "No"..

Regards,

Duncan.

 

[Owen]

Reply: 1.1
From: Owen .


So the bottom line of all that is you can't purchase a house in a company/trust entity and then negative gear it to yourself. All the costs are claimable by the company/trust entity but the additional interest payments required, because the rent isn't enough, are not claimable.

So I would received a distribution from the trust, pay tax on it, pay it back to the company as rent, the company can't claim the loss on tax so other income would have to top up the loan meaning less income is redistributed back to me.

But if the rent was more than the out goings then it would be OK to do? Would there be any reason to do so?

So I would received a distribution from the trust, pay tax on it, pay it back to the company as rent, the company pays tax on that and redistributes it back to me.

Stop it - I'm getting a headache.

 

[WebBoard]

Reply: 1.1.1
From: The Wife


No Owen, I thought it was still claimable? You cant claim any gst back on resi's. but check it with an accountant, i am not an accountant )


~Life is a daring adventure, or nothing at all~

 

[WebBoard]

Reply: 1.2
From: Anonymous


Duncan,

Thanks for the response. Apologies for the tardiness of the reply, but as a newby, I couldn't find your response again - (only found it now by searching for keywords!) I have looked at the ATO links and they were confusing but very informative. I thought I had found a way 'round the problem by selling on the property to a company I own, and then renting it back. Unfortunately, due to the stamp duty costs in NSW, its just not worth it.

I think the only thing to do with the house is to sit tight, let capital growth catch up and be brave enough to buy an IP to decrease our tax!

Many thanks.

FCB