Negative Gearing with a twist

Hello All,

Me and one of my friend is planning to build a house each and are also planning to live as tenants.

Is this legal? Can I claim tax deductions + Negative Gearing?

Hypothetically, if a house costs 550K and if we rent this out to each other at $420 a week.

Effectively, the interest on 550K per year is 31,000 (@7%) and our rental incomes could be 21,000. WE will be negatively geared by 10K a year

Will this arrangement work?
 
Hello All,

Me and one of my friend is planning to build a house each and are also planning to live as tenants.

Is this legal? Can I claim tax deductions + Negative Gearing?

Hypothetically, if a house costs 550K and if we rent this out to each other at $420 a week.

Effectively, the interest on 550K per year is 31,000 (@7%) and our rental incomes could be 21,000. WE will be negatively geared by 10K a year

Will this arrangement work?
Do you mean you're planning to live in each other's homes, ie he'll live in yours, and you'll live in his? If so, yes, this can work, but the problems come about when one or both of you want to do improvements. When you live in a property, you'll tend to do stuff (landscaping, gardening, re-painting, etc) to make the house "nicer", that a tenant wouldn't do. So if you want those rewards that come from home ownership, well, you'll lose those.

It's effectively just the same as a standard investment property; the fact that you're each other's tenants is really irrelevant.

Don't forget that you lose any first home owner benefits that you might otherwise be entitled to, and exemption from capital gains tax, as for any other investment property.
 
A "trick" from "Saving Tax on Your Investment Property" by Julia Hartman and Noel Whittaker is if you are both first home buyers you can qualify for the FHO Grant as long as you live in your property for the first six months.

You could then swap houses as and as long as you rent from each other at a fair market rent you are ok. Claim expenses for interest, depreciation and other rental expenses while your place is rented.

If you then return to live in your place within six years you can continue to claim an exemption from CGT as it is your PPOR. I think you can also move out and do it again for another six year period as long as you continue to return within the six years.

I'm not an accountant so check it out further.
 
The properties have to be rented to each other at market rents. As time goes by that negative gearing amount reduces to nothing. By this time, the capital gain in the property will be quite significant. Leave it too long and the loss of the capital gains exemption will cost you dearly.

So you have to ask yourself how long you plan to have this arangement in place for? A couple of years will be just ok, any longer will cost you.

Gools
 
Thanks for your reply, ozprep

The plan is to live in our own houses for 12 months and then get into renting each others place. I think this should cover the CGT issue.

Regarding home improvements and the like, we're planning to build 2 homes with same designs landscaping, features, fixtures etc.

So yeh, there could be times where he would like a small pool in premises whereas I would opt for a small workshop/studio.

The tax benefits that we would get every year should keep us happy.



Do you mean you're planning to live in each other's homes, ie he'll live in yours, and you'll live in his? If so, yes, this can work, but the problems come about when one or both of you want to do improvements. When you live in a property, you'll tend to do stuff (landscaping, gardening, re-painting, etc) to make the house "nicer", that a tenant wouldn't do. So if you want those rewards that come from home ownership, well, you'll lose those.

It's effectively just the same as a standard investment property; the fact that you're each other's tenants is really irrelevant.

Don't forget that you lose any first home owner benefits that you might otherwise be entitled to, and exemption from capital gains tax, as for any other investment property.
 
One other issue to consider is how an 'exit strategy' would apply. So whilst the arrangement might work for you now, what will happen when circumstances change.
 
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