Is it innovative way to do tax or hidden trap?

Discussion in 'Accounting and Tax' started by phan, 13th Oct, 2009.

  1. phan

    phan Member

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    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
     
  2. Propertunity

    Propertunity Real Estate Buyers Agent

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    IF she sells, only that % of the house that she rents out, would be subject to CGT

    No, you have that part wrong.
     
  3. Pushka

    Pushka Member

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    I think it is correct - it is added into the CGT calculation.
     
  4. morg

    morg Member

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    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:)
     
  5. Pushka

    Pushka Member

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    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.
     
  6. phan

    phan Member

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    That's what my accountant said which i preferred his simpler "pay back" explanation as Pushka already posted
    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?
     
  7. morg

    morg Member

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    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.
     
  8. depreciator

    depreciator Member

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    It's only depreciation claimed on the building that has CGT implications. The fixtures and fittings don't come into it.
    Scott
     
  9. Pushka

    Pushka Member

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    The building depreciation is usually the 'big number' though, isn't it?
     
  10. Propertunity

    Propertunity Real Estate Buyers Agent

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    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. ;)
     
  11. Terryw

    Terryw Investor

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    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.
     
  12. The Y-man

    The Y-man Member

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    Unless.... she rents it out as fully furnished :D Whole new set of implications....

    The Y-man
     
  13. maloriopolium

    maloriopolium Member

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    What implications do you mean?
     
  14. Pushka

    Pushka Member

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    Which is what we do. How does this change CGT calculations Y?
     
  15. The Y-man

    The Y-man Member

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    Not CGT, but there'll be a whol lot more accounting in depreciation for furnishings etc

    The Y-man
     
  16. Pushka

    Pushka Member

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    Ok, gotcha, the first year was rather nice with write-off and depreciation of the all furnishings and fittings.