Renting a house for below market rent

[AlanT]

Can anyone please tell be if there is a specific law against myself buying a house and renting it to someone that I know will look after it, In return they maintain it and I wont need to have it managed or pay landlord insurance . For this I would reduce the rent from $240 to $125 and negative gear it.

Thanks

Alan

 

[Jas]

Search the ATO's site for 'fair market rent' and 'at arms length'.

Jas

 

[Sim]

Yes, you would only be able to claim a proportion of the interest as a deduction - with your example, 52%. It's clearly covered in the rental properties handbook from the ATO.

 

[magich2o]

Assuming that we can verify, by looking at similar properties, that the fair market value is $240.

Then, in Alan's case below, should the fair market value then be based on $240 or should it be reduced to $223 (assuming that average agent mgt fee is 7%)? We can then reduce that a little due to lack of need for landlord insurance, advertising costs, etc so that the fair market value of renting that place could end up being around $210-$215.

Hence, we continue to claim 100% of the interest on $210 instead of $240.

So, my question is: is fair market value based on the advertised price (which includes agent's commission) or is it based on what you can actually let out the place for (which does NOT include agent's commission, advertising, etc).

Of course, if we rented it out at $125, then this is clearly not fair market value anymore and you then need to apportion it accordingly as per Sim's explanation.

 

[razorback]

Arms length rental and APSI Rules

Search the ATO's site for 'fair market rent' and 'at arms length'.

Jas

Dear forum,

Can someone please clarify what is meant by the term "arms length rental"?

Steve

 

[willair]

Alan,
i agree with everyone,but to run this set up without insurance,thats
always my first cheque,just one question do you undrestand negative
Gearing..
good luck
willair..

 

[Beach Bum]

Can the tenant bill you for his services & maintenance?

Could he do this as a hobby so as not to charge GST or need an ABN?

If it is a hobby would it still be taxable income?

 

[JoannaK]

Dear forum,

Can someone please clarify what is meant by the term "arms length rental"?

Steve

Hi razorback,


from www.investorwords.com

arm's length transaction

A transaction between two related or affiliated parties that is conducted as if they were unrelated, so that there is no question of a conflict of interest. Or sometimes, a transaction between two otherwise unrelated or affiliated parties.



arm's length price

The price at which two unrelated and non-desperate parties would agree to a transaction. This is most often an issue in the case of companies with international operations whose international subsidiaries trade with each other. For such companies, there is often an incentive to reduce overall tax burden by manipulation of inter-company prices. Tax authorities want to insure that the inter-company price is equivalent to an arm's length price, to prevent the loss of tax revenue.


hope this helps.

 

[Ebbie]

Hi all, I am renting an IP to a relative with a formal lease in place and although I started with the rent at market value I have been reluctant to increase it each year in line with the market rent. Here's a statement I signed and filed away this year to help justify to the tax office, if I ever need it, why I am not receiving full market rent. I don't have experience with this sort of thing so I'm not saying it will work. I'll leave it up to the ATO to decide whether I'm entitled to still claim full interest deductions.

JUSTIFICATION FOR REDUCED RENT – XXX STREET, SUBURB XXX.


A new residential tenancy agreement has been entered into with Mr and Mrs XXX for my property at XXX Street, SUBURB XXX, NSW.

I estimate the current market rent to be $180 per week based on the following comparable rental properties for the area:

Address/ Asking Rent/ Description/ Comparison

XX St/ $155 p.w / 3 beds, older style home,
new kitchen, paint & carpet
on large block./Inferior

XX Ave/ $175 p.w/ 2 beds, fresh paint & carpet,
weather-board home, single
garage on large block./Inferior

XX Rd/ $175 p.w/ 2 beds, open plan living, brick
home with double garage./Similar

XX Road/ $180 p.w/ 3 bedrooms, open plan living,
polished floor boards, carport./Similar

XX Pde/ $185 p.w/ 3 bedroom, brick & tile home,
small yard, garage, opposite
riverfront./Superior

XX St/ $185 p.w/ 3 bedrooms, ensuite, brick &
tile home, with double garage./Superior

The tenants have requested a 2 year lease and I have agreed to set the weekly rent at $160. The security of having good, reliable tenants gives me the following benefits and savings:

• Property Management: no requirement to pay an ongoing property management fee, a saving of 7.7% or $13.86 per week.
• Landlords Insurance: no requirement to insure against a loss of rent, a saving of $315 p.a. or $6.05 per week.
• No Vacancy Period: a long-term lease ensures no loss of rental income during vacant periods (normally two weeks rent per year between tenancies), a saving of $360 per annum or $6.92 per week.
• No Re-Letting Fee: a re-letting fee of ½ a weeks rent is not applicable, saving $90 p.a. or $1.73 per week.

As a result of saving approximately $30 per week in rental expenses I believe a reduction in rent of $20 below the current market rent is justified.

This is fair to me. Any comments as to whether the tax office might agree?

 

[Mry]

It might be important to point out that these market value rent situations only really apply when you are renting out to a related party. The ATO doesn't try to interfere in pricing decisions by making up their own mind on what the market should charge. There are a myriad of reasons why people would charge below market rate.

Does it sound fair that you would be forced to downgrade your deductible claims because you charged a lower rent than what the market is charging because you wanted tenants in quick? Does it sound fair that you have to check with the real estate agent every year to make sure that you are charging your tenants the market value of rent because charging say $5 less will eliminate all of your negative gearing benefits?

What the ATO do want to avoid is you charging $50 a week to Grandma so she can live in a $500,000 brand new fully financed house on the beach while you get the full benefit of the deductions. Check out IT2167.