Investment advice

[wombat 2003]

My husband and I are thinking about buying an investment unit which friends of ours are going to rent from us. They will then buy a unit that we will rent off them.

We will more than likley buy off the plan in the same development.

We do not have any other properties and see this a a way for us to get into the expensive Sydney market and get tax advantages at the same time.

Dos anyone have any advice on this kind of strategy ?

 

[WillG]

Sounds good as long as you remain friends and keep each others units in good condition.

Do you realise you will be charged CGT if you sell the unit sometime down the track ?

Cheers

 

[wombat 2003]

The friendship will not be a problem and the units will be keptin good condition.

Can you see anyissues witht he Taxation department with this kind of arrangement ?

 

[NigelW]

Originally posted by wombat 2003
The friendship will not be a problem and the units will be keptin good condition.

Can you see anyissues witht he Taxation department with this kind of arrangement ?

Hi Wombat

As long as the rent is at a commercial rate and you have a standard rental agreement under the legislation for your state there should be no problem with the ATO.

You should get market appraisals from some real estate agents to demonstrate that the rent is at a market rate.

BUT

Having said all that, I stand by my general rule that business dealings with friends are generally a bad idea. It's okay if you subsequently become friends with a business partner, but you must beware that an initial friendship doesn't cloud your commercial judgment.

Think about having to evict your friends for non-payment of rent for example.

We all think things can't go wrong, but people and their circumstances always change over time - sometimes for the worst.

You should plan for all the bad eventualities you can think of. Hopefully they won't actually occur, but if they do you will be prepared.

Sorry to sound like a wet blanket, but think very carefully about this before proceeding, and if you do proceed treat it like any other business dealing and document it fully.

good luck
N.

 

[surgesg8]

I guess what Wombat 2003 is asking in regards to tax implications when people are renting each other properties is -

1. If friends leave in one suburb and they in another in exactly same sort of property (let say unit for that matter) they can always say to tax people that it is more convenient to get to work or to go see parents, or send kids to school.

2. On other hand if two units in complex (or two units in duplex) are separated only by corridor of 4 meters width or common wall, what do you do then? How do explain why you are renting from each other, what can you say (?) - trying to minimize the tax bill (?) or are experimenting with new swap system? That's one and other side of it is can tax office match'm up, units to owners and owners to units and see if they actually do leave across the road (corridor) from each other? Put it other way - how far can you push limit.

May be the answer to you question Wombat, lays in the use of different tax agents (accountants), that way data which is presented to tax office for tax refund is separated to some extent. It would not be separated completely simply because it ends up on same system, but to some extent it would.

Thank you.

SG

 

[Rolf Latham]

Ummmm

I dont think it matters who you rent from and whom you rent to provided its above board,

Ta

rolf

 

[saskatoon]

Hi wombat 2003.
Years ago I was advised not to try this same scheme.
My accountant at the time (ex- ATO) said that if there is no commercial advantage, and the sole purpose of the scheme is that you and your friends are doing it for tax reasons, then the onus may be on you to prove that it is not tax evasion. How about 'conspiracy to defraud' .
Does anyone know of a ruling for or against this arrangement?
Terry

 

[D.T.]

Hi Terry,

May I ask how the ATO would know that you and your land lord are friends?

-Regards

Dave

 

[INVESTRON]

if you want to stay friends - don't.

if you don't care if you remain friends, then it's ok.

it's as simple as that.

 

[sbe]

Be careful. Friends can be ex friends over this - and I'm speaking from experience.

It can work beautifully, and crash spectacularly - I had both experiences with the same person. Started great, went great for a while, then crash n burn.

Second.

The ATO do check certain things on your tax return, including where you live and where your properties are. You could have explaining to do if it's in the same complex, it's rented (data matching from other person's return) and you have one, they were both bought around the same time etc etc.....

It could lead to questions, especially the type of "explain how this isn't evasion..." as others have suggested.

These days they do ask for the actual address of the properties for that reason - data matching - they're awake to that one.....

My advice - rent from a stranger and have a property (not in the same place) that you rent to a stranger. Same effect, less risk and you can prove it's above board.

Cheers,

Simon.

 

[paul_s]

if the rent must be at commercial rates then is their much advantage in this over simply renting any old place on the market and buying an investment property, it would seem to achieve the same thing without any potential taxation issues?

 

[always_learning]

What is the ATO position on owning a property in a hybrid trust and renting it to yourself? ie. Trust owns it, you live it in, pay market rent to the trust, get to claim the "negative gearing" benefits.

As with these issues, doing this weith friends could work out fine, but you need a clear/agreed exit points?
I would only do it if I expected to either :

• Live in the property that I personally purchased in the short to medium term ( 1-3 years).
• Lease it out as a standard IP.

If so you need an agreement limited to short time frame 18 months this would allow you to claim some of the upfront costs etc, some of the depriciation and of course the "returning the property to orginal condition " repairs when you move back in (new carpets etc). A term 18 months maybe you can expect people to be reasonable stable, but with humans overy 5 years timeframe things change (babies, divorce, death, other interests, renovations, lost job/income, moving interstate).

 

[Duane (Fitman)]

Hi Always_learning,
Trouble with buying it with the Trust is your name appears as a director of the trustee for the trust in which you are a beneficiary... notice something here?... like your names just appeared three times here??? heheheh. get a good accountant & a very smart Lawyer to help you with this one... as with jv deals & unit swapping with friends to get tax deductions???? crikeys people, don't learn from the `school of hard knocks' cos when she bites...she bites bad!
Look for better deals, claim whats allowable & do it with integrity & honesty. What looks rosie & smells great on the outside can sometimes have a distasteful centre....
Hope it all works out for you tho...
Cheers,
Duane