Is it innovative way to do tax or hidden trap?

Hi all,

My friend and I have a talk over lunch yesterday and I just felt a bit strange about what her accountant did.

My friend bought her principle resident 2years ago and pay P&I for it. Last financial year her accountant suggested they could do something with her cash flow by turned part of her house into investment so she can claimed tax back. Now on the paper only her brother will rent 1 room and because it’s negative gearing she will be able to have some cash back from tax men.

My question is What is the pros and cons of doing this? In short term she have more cash return but what are the hidden disadvantages? If she sells her house would part of it become subject to capital gain? She’s doing depreciation on her house for above purpose. Does everyone do that too? To my understanding that you have to pay back what you claim on depreciation once you sell the house, and is there any other reasons to do it on your own house ?

Thanks for your input
 
I was under the impression that the amount of depreciation claimed is added to the cost base when calculating any cap gains.
To answer the OP, I think your friend can only proportionately claim any of their holding costs and expenses. The CGT liability will then be worked out from the same %. ie. 50/50 PPOR/IP.
I think your friend is probably better off just taking cash from their boarder:)
 
I was under the impression that the amount of depreciation claimed is added to the cost base when calculating any cap gains.


Yep, those are the terms that sound familiar. So in effect, you 'pay back' a proportion of the deductions that are claimed, except those that have been written off.
 
I was under the impression that the amount of depreciation claimed is added to the cost base when calculating any cap gains.
That's what my accountant said which i preferred his simpler "pay back" explanation as Pushka already posted
I think your friend is probably better off just taking cash from their boarder:)
It makes more sense if she does that. In reality my friend didn't have any income from the rent, she did it on paper to claim few more $K a year without knowing what she will give back if has to sell :(

So is there any other disadvantages she needs to be aware?
 
If your friend is claiming tax deductions for their PPOR and not receiving or declaring any income from a boarder then I would think that being convicted of fraud might be a major disadvantage of this "innovative way"
Good luck.
 
The building depreciation is usually the 'big number' though, isn't it?

It is 2.5% of a big number, yes. But other things (not the building) can depreciate faster i.e. over 5 & 10 years as opposed to the 40 years for a building, so those numbers can be big too. ;)
 
Hi all,

My friend and I have a talk over lunch yesterday and I just felt a bit strange about what her accountant did.

My friend bought her principle resident 2years ago and pay P&I for it. Last financial year her accountant suggested they could do something with her cash flow by turned part of her house into investment so she can claimed tax back. Now on the paper only her brother will rent 1 room and because it’s negative gearing she will be able to have some cash back from tax men.

My question is What is the pros and cons of doing this? In short term she have more cash return but what are the hidden disadvantages? If she sells her house would part of it become subject to capital gain? She’s doing depreciation on her house for above purpose. Does everyone do that too? To my understanding that you have to pay back what you claim on depreciation once you sell the house, and is there any other reasons to do it on your own house ?

Thanks for your input


Its crazy i think - a tax time bomb. They may save a few hundred in tax, but will lose the CGT exemption on the part of the house rented out - just at the time when properties are going up in value again.
 
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