Renting out property to relatives with a loss

[johk]

Hi,
Is it possible to rent out your house to relatives but significantly under the market value?
What would the tax department say?
For example, we have a townshouse that currently rents for 475/w but I am considering renting to my parents in-law for around 300/w.
I still need to check how this will affect my income and tax but theoretically would this be OK.

Thanks,
Jonas

 

[Ace in the Hole]

Supposed to be arms length.
Why not rent it to them for $450, self managed the reason a little lower than market.
Maybe your wife can palm them a buck fifty for grocery shopping or something like that.
Assuming you're doing this for deductions.
Not advice just my random thoughts.

 

[wylie]

A friend of mine bought his parents' house when they divorced. His father moved elsewhere and his mother stayed in the house, paying nominal rent.

For years they have had to pay tax on the "market rent" even though they don't get market rent. I guess that means they can claim full deductions. They have a good accountant, so I guess the advice they get is right.

I would definitely run this past your accountant, and/or the tax department. You don't want to get it wrong.

 

[Redom]

Wylie is spot on. It's got to be charged @ market rent, at least that's how the taxman will view it.

Ace in the Hole has come up with a good and reasonable way to get around it. But the differential in rent price that your talking is unlikely to fly.

 

[twodogs]

It need not be market rent. If you receive 50% of market rent then claim 50% of expenses.

 

[Terry_w]

Hi,
Is it possible to rent out your house to relatives but significantly under the market value?
What would the tax department say?
For example, we have a townshouse that currently rents for 475/w but I am considering renting to my parents in-law for around 300/w.
I still need to check how this will affect my income and tax but theoretically would this be OK.

Thanks,
Jonas

Yes that is fine - but don't expect to be able to claim all expenses in full. You would probably only be able to claim 300/475ths.

Also, think about the asset protection implications - under remuneration, although this is a small amount.

 

[jrc]

Paras 13-16

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

 

[johk]

Thanks for all the responses

I would not do this from a tax deprecations point. My parents in law might lose the house they currently have.
I was thinking about a solution for them/us to not have to get a house in commission style home for them.

As we have some equity in the IP ? about 75k ? I will see if we can use that to purchase a smaller apartment (around 270k) that they can then rent of us.
That would also mean that it wouldn?t be a big difference btw market rent and rent we receive.
Reading the paragraph in the link JRC provided - If we have a proper rental agreement btw us (we wouldn?t us a property manager) we would be OK?

Thanks,
J

 

[Perp]

If we have a proper rental agreement btw us (we wouldn?t us a property manager) we would be OK?

Provided the amount of rent reflects market rates, yes.

 

[twodogs]

I own half my Mother's home and she pays half of a lower range market rent. No agent and no written lease. But, and it's a big but, this is a long term highly inflexible investment. It's really not my house. No selling, no changes, no significant rent increases or maybe even rent being stopped if required. It is family after all. I entered this arrangement 7 years ago when I felt much richer than I was and would love to get out but... long term commitment.

The only documentation was an agreement, done with a solicitor, confirming the arrangement just in case other relatives cause trouble. It is family after all.

Oh, and don't expect your wife to understand why your Mother gets a nicer home

 

[dexx]

For years they have had to pay tax on the "market rent" even though they don't get market rent. I guess that means they can claim full deductions.

I've never understood why you wouldn't charge a relative/friend market or near market rates. If you want to help them out, then just pay some of their bills.

 

[Perp]

Oh, and don't expect your wife to understand why your Mother gets a nicer home

Ha! Can't blame her...

 

[marg4000]

My understanding is that if you charge significantly below market rent you can only claim expenses up to the value of the rent received, i.e., no negative gearing advantages.

As always, check with an accountant experienced in these matters.
Marg