First home buyer / Renting to relative / Renovating

[Jehtie]

I have been searching the net all night for a possible answer to this:

My wife and I are looking to buy our first property in the next three months and intend using the first home buyers grant. My brother will live with us in the new property.

Are we able to rent out the property to him as soon as the six months is up and then renovate immediately after to claim a capital works deduction? We intend renting to him legitimately (bond / tenancy agreement etc.) and doing a blitz renovation before moving into his property and doing this same.

The end result is to set this up as an investment property and leap frog each other.

Or is it better just to renovate from the start, complete it by six months and lease it out to tenants while we move into his?

We do not want to break any laws, however we don't regard the system as a grey area, it's either legal or illegal. If anyone can shed some light on this, we would appreciate it!

Thank you so much.

 

[thatbum]

I'm a bit confused what you mean by "leapfrogging each other" - when is your brother is moving in and you moving out etc?

But generally after the 6 months of compulsory living in the premises, you can do whatever you want. And I don't see it making a big difference tax-wise when you exactly do the renovations (maybe I'm missing something though).

 

[westminster]

I'm assuming perhaps that the brother wants to get first home buyers grant for his property as well.

Who will live in the brothers IP whilst you are all in #1? Or will he buy it when you are ready to leave #1.

Timeline
1. Buy #1 FHB PPOR
2. Live in #1 for 6mths all together
3. Rent #1 to brother and renovate
4. Rent to 3rd party renovated
5. Buy #2 ( brother FHB PPOR)
6. Live in #2 for 6mths all together
7. Rent it from brother and renovate (where does brother live now?)
8. Rent to 3rd party renovated (where do you all live now?)

I think it's doable but you need to be careful with logistics. Make sure you don't start renovating too early into the leap frog otherwise the ATO will question it. I would wait 3mths at least before renovating.

 

[Jehtie]

Hi Guys,

Thanks for your reply.

I guess the real question I am asking is can my wife and I live in a property that we are renting out to a relative as an investment property? And vice versa - that is; can my brother rent out a property to us as an investment property and he still live there?

We all intend to live together during the whole process. I have heard (through a seminar) that you only need to rent out for a night before you can claim a renovation as a tax deduction although I am led to believe now that it is in fact a capital works. We also intend to rent out fully furnished, so how long do we have to wait to buy new furniture for the place to claim tax benefits. In saying all this, we aren't doing this property for the tax exemptions, but if we do get all these benefits, we are prepared to wait so that it fits in with the legal guidelines.

As to your question 7 - we would all live together (and he will qualify for the FHB grant also)

As to your question 8 and in answer to you 'thatbum' we intend buying our second IP (repeating the whole process - hence the leapfrogging expression)

Would the ATO question our renovation immediately after renting out because of ethical issues or is it illegal?

Thanks!

 

[westminster]

I would be wary of advice from seminars

Whilst they are sometimes correct they aren't the ones who get in trouble with the ATO and can make all sorts of promises. However some offer excellent advice. The best advice is to listen then follow up with your own independant advice from a trusted accountant - even advice from here carries a risk.

I don't know the exact answer about when you can renovate to be able to claim it but to the best of my knowledge it needs to be after it's rented and you can claim it under depreciation - there is an excellent read about depreciation that will answer a lot of questions from Scott a member here. http://www.depreciator.com.au/ebook-download.html

I would always err on the side of caution and wait a reasonable amount of time - use that to plan, get quotes, compare prices, line up trades.

 

[BHK]

you and wife buy the A house, then do FHG
after 6 or 7 months, renovate
brother rents the A , with bonds and agreement
then brother buys B house and move in with you guys
rent the A to 3rd party do the FHG

i know a friend did this but with other friend
same family name may catch the eyes
report to ATO with the money in and out
and also make sure the addresses you and brother are different before all this happen

 

[Jehtie]

Hi,

Shouldn't my brother rent out first before renovation or can we claim a tax benefit of a renovation just before making it a IP? My understanding (small that it is) is that any changes to a property needs to occur after the property has been rented.

Again, if it is illegal to rent out a property to someone and reside there then we simply won't do it.

I will try and find a property savvy accountant who invests in the next couple of days to give me an exact answer that I will post.

 

[Jehtie]

I don't know the exact answer about when you can renovate to be able to claim it but to the best of my knowledge it needs to be after it's rented and you can claim it under depreciation - there is an excellent read about depreciation that will answer a lot of questions from Scott a member here. http://www.depreciator.com.au/ebook-download.html

Great advice Westminster, thank you so much.

 

[C-mac]

The best advise I can give you is this; consider the council of your (our!) peers on this forum, but then go and detail your plan to a qualified account, who will query with the ATO. It sounds like a good plan and I 'get' why both families are trying to do it, but you need to be 100% square with the ATO; only an experienced dedicated accountant will make this so.

 

[Jehtie]

The best advise I can give you is this; consider the council of your (our!) peers on this forum, but then go and detail your plan to a qualified account, who will query with the ATO. It sounds like a good plan and I 'get' why both families are trying to do it, but you need to be 100% square with the ATO; only an experienced dedicated accountant will make this so.

Thanks Cameron,

I have since seen an accountant regarding this. As it turned out, our circumstances changed and we were not required to seek advice from the ATO regarding this.

 

[vaughan]

I have heard (through a seminar) that you only need to rent out for a night before you can claim a renovation as a tax deduction although I am led to believe now that it is in fact a capital works.

The general principle is this: if you need to spend money to make money, you only pay tax on the profit. This works for everything, and is why you can claim computer, phone and home office expense off your PAYG to get a bit of tax back each year.

If you have an income-generating investment, you only pay tax on the income minus the expenses.

If you have expenses but no income, you cannot claim anything.

When calculating the expenses, you can only claim for the time that the investment was generating income, or was available for generating income.

So if you have a house by the sea and rent it out 3 months of the year and live in it for the other 9 months (or otherwise don't have it available for rent, like let a friend stay in it for free while it is vacant) then you only can claim 3/12 of the expenses of the house.

 

[Jehtie]

So if you have a house by the sea and rent it out 3 months of the year and live in it for the other 9 months (or otherwise don't have it available for rent, like let a friend stay in it for free while it is vacant) then you only can claim 3/12 of the expenses of the house.

Thanks Vaughn,

That makes sense and is league with what my accountant says and what I've learned from the past.

 

[wylie]

I'm thinking you cannot claim your house is an IP, renting it to your brother WHILST also living there yourselves.

You are asking for trouble.

 

[Jehtie]

Hi Wylie,

That's correct. The official word from the ATO is that I can't have it both ways. It has to be either an IP or PPOR. I still haven't conclusive advice from them into whether or not renting it out first changes what I can claim for capital works. Hopefully, I will find out in the future, fingers crossed