Renting IP to son

What are the tax implications of renting an IP to a family member (22 yr old son & partner) ?
Rent would be based on written quotes obtained from Property Agents and correct tenancy agreements, bonds etc would be in place.
The arrangement is mutually agreeable to both of us, but would the ATO take a dim view of this?
Anyone have any experience or hints on how to do this properly and still retain the investment tax status of the IP.

Mike
 
What are the tax implications of renting an IP to a family member (22 yr old son & partner) ?
No difference in tax implications renting to family or strangers, provided you do as below Mike.

Rent would be based on written quotes obtained from Property Agents and correct tenancy agreements, bonds etc would be in place. The arrangement is mutually agreeable to both of us, but would the ATO take a dim view of this?
The only thing the ATO takes a dim view of is unrenting the property to family (or anyone else for that matter) and still claiming the full expenses available (depreciation, repairs, interest, rates etc).

Anyone have any experience or hints on how to do this properly and still retain the investment tax status of the IP.
It must be rented at market rates, so do all the usual market rent reviews, inspections etc as per a normal tenancy and you should have no issues with the ATO.

Alan
 
Rent would be based on written quotes obtained from Property Agents and correct tenancy agreements, bonds etc would be in place.

Mike

May be a stupid Q, but how would ATO know that you have rented to your son?

KK
____________________________
Trust your hopes, not your fears
 
Thanks Propertunity,
My thoughts were as long as I keep it on a commercial basis I should be OK, just wanted to tap the collective wisdom of SS in case there are some bear traps.

KK - good question, but I never underestimate the systems the ATO have these days for cross checking info.

regards
Mike
 
have you decided if you will put the partner on the lease, or just your son? just something to consider in case of a parting of the ways :)
 
do you have a good relationship with an REA who may be able to give you a decent range of rents of which you could take the lower end?
 
have you decided if you will put the partner on the lease, or just your son? just something to consider in case of a parting of the ways :)

Will put both on the lease as I am confident in the relationship(s) involved.

do you have a good relationship with an REA who may be able to give you a decent range of rents of which you could take the lower end?

Will get written rent appraisals as per my standard process and will use the appropriate one ;)

regards
Mike
 
May be a stupid Q, but how would ATO know that you have rented to your son?

KK
____________________________
Trust your hopes, not your fears

If they do an audit.

Of course, any accountant doing their job will also not allow you to claim the full deductions if you under rent to a family member.
 
It really doesn't have to be a family member - if you significantly under-rent to ANYONE (for whatever reason) you may have proportionate deductions knocked back in an audit.
Marg
 
The ATO have a tax ruling on this:

Letting of property to relatives

13. Where property is let to relatives the essential question for decision is whether the arrangements are consistent with normal commercial practices in this area. If they are, the owner of the property would be treated no differently for income tax purpose from any other owner in a comparable arms length situation.

14. If property is let to relatives at less than commercial rent other considerations arise. Unless the arrangements are comparable to those in FCT v Groser referred to earlier, the rent would represent assessable income. It would not necessarily follow, however, that losses and outgoings in relation to the property would be wholly deductible. The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and in letting out to relatives.

15. In the Kowal case, for example, the Court found that the taxpayer had two purposes or objects in mind in acquiring the relevant property. One was to provide his mother with a good home at moderate cost. The other was to earn assessable income. The Court further found that the second purpose or object was the predominant one and, in the result, allowed income deductions for 80% of the losses and outgoings falling within sub-sections 51(1) and 67(1). In the Groser case, on the other hand, the Court expressed the view that, if the weekly rental had been assessable income, it would have allowed no more than $104 by way of deduction under sub-section 51(1) - the reason for this being that private or domestic purposes for the expenditure predominated over the purpose of producing assessable income.

16. As has been said earlier, decisions in these cases will ultimately depend upon the facts of each case. As a matter of experience it is unlikely that there will be sufficient information provided in return forms to enable a final decision to be made. In these circumstances, and as a working rule, income tax deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received. Whether any additional deduction is to be allowed will depend upon the nature of any further information provided by the taxpayer.


source: http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2167/NAT/ATO/00001
 
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