Renting out room to boarder for PPOR -tax implications?

[mamie]

So I'm considering buying my first house in VIC.

If i get a 2 bed place, I'm wondering what the implications are if i want to rent out one of the rooms to a friend?

I would like to follow the simple path and just have them pay me rent. Since it will be at or less than half of the mortgage payments, rather than me claim a deduction, i'd just wear the loss and then when i come to sell the property in the future, i'd like to claim a full capital gains tax exemption. is this possible?

Otherwise:

Does it affect the following things:
-My eligibility for the first home owner's grant of $7k
-my eligibility for the stamp duty reduction for first home buyers
-capital gains tax on the property if i was to sell it in the future. would my property still be capital gains tax exempt, or would only a portion of it be?
-insurance on home and contents?

Does it affect my tax return at all?
-eg. can i claim any of my mortgage as a loss for negative gearing purposes? i realise not all of it could be claimed, but what about some due to difference between mortgage payment and rent received?
-i assume i have to claim the rent as income on my tax return?
-can i claim depreciation for any improvements to the property or other improvements like only painting the room that my friend would stay in?
-any affect on land tax?

Also my friend is currently getting rent assistance from centrelink (currently studying) so for them to continue to claim it, they would need to show that they are paying me rent. Also i dont really want to be dodgy about this.

Thanks!

 

[westminster]

You need to pick which side you want to be on.

You can claim depreciation, interest, maintenance etc all the IP stuff at pro rata rates if you then declare income and pro rata CGT at the end.

Most likely you can still get your FHB discounts but you need to read the wording carefully.

You can't have your cake and eat it though and get all the IP benefits and the PPOR benefits.

 

[Ed Barton]

Most likely you can still get your FHB discounts but you need to read the wording carefully.

The FHOG will not be payable, don't know about stamp duty discounts.

 

[kathryn d]

Is she able to take a boarder/ roommate and not make any deduction claims, nor count it as income?

 

[westminster]

Is she able to take a boarder/ roommate and not make any deduction claims, nor count it as income?

Possibly though it's not in the spirit of the deal. Her friend also couldn't then claim rent assistance without alarms/red flags being raised.

 

[kathryn d]

Possibly though it's not in the spirit of the deal. Her friend also couldn't then claim rent assistance without alarms/red flags being raised.

Hmmm...ok

I thought it would fall under this:
http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2167/nat/ato/00001

"Occupancy of part of a residence on the basis of the occupants' sharing household costs such as food, electricity and cleaning, etc.

18. What will be decisive in cases of this nature will be the characterization of the arrangements, i.e., do they produce assessable income. Situations arise where the owner of a residence permits persons to share the residence on the basis that all the occupants, including the owner, bear an appropriate proportion of the costs actually incurred on food, electricity, etc. Arrangements of this nature are not considered to confer any benefit on the owner. There is no assessable income and the question of allowable deductions does not arise. "

The roommate needing a form signed, has nothing to do with the owner, but rather just paperwork required for "rental assisstance"

 

[mamie]

Thanks for the responses so far, i knew i'd get some answers here

The roommate needing a form signed, has nothing to do with the owner, but rather just paperwork required for "rental assisstance"

I just checked the centrelink website and it says this:

You will need to give us proof that you pay rent, and you will need to complete a Rent Certificate. You can obtain the form using Online Services or at your nearest DHS Service Centre.

If you have a formal written tenancy agreement, you will need to show it to us. If you do not have one, or are not named on the tenancy agreement, the person you pay rent to will have to sign your Rent Certificate

So i would need to sign off that they are paying me rent. I believe this would then mean that i would have to claim the rent as income.

You can't have your cake and eat it though and get all the IP benefits and the PPOR benefits.

I'm not seeking to be in a better financial position, i just want to make sure that i can buy a place and get whatever FHB concessions i would get if i don't have a boarder and i want to make sure that they keep getting their centrelink so that they aren't worse off.

The FHOG will not be payable, don't know about stamp duty discounts.

Can you please clarify? From what i have found, to be eligible for FHB, it seems that i have to live in the place for the first 12 months (or whatever it is) and it doesn't mention anything about whether i have boarders. Same thing for stamp duty discounts afaik?

 

[INVSTOR]

Years ago when I questioned Ato it could fall as under neg gearing (pay tax when you sell) or personal arrangement. Best to ask accountant who specialises in property.

 

[Munchkin]

With centrelink rent assistance forms you have to say if you are paying just 'rent', or a boarding/lodging fee, for which you don't get full rent assistance because the payment you are making isn't strictly rent.

The owner can't sign the form saying the friend is paying rent but then not declare it as income.

 

[Munchkin]

I'm not seeking to be in a better financial position, i just want to make sure that i can buy a place and get whatever FHB concessions i would get if i don't have a boarder and i want to make sure that they keep getting their centrelink so that they aren't worse off.

I'm not sure you can have it both ways

 

[westminster]

And Centrelink and the ATO share data so just make sure you do get it right.

 

[kathryn d]

You should contact the ATO, because you should not feel you are doing anything wrong.

Ask yourself this question:
If the roommate wasn't on rental assisstance, and you didn't need to sign any forms, would you be declaring the "rent" or would you consider any payments to you as help, and not requiring to be declared.

 

[coastymike]

If it exceeds more than mere coverage of food, electricity, etc then it will probably be assessable income.

Refer PBR 1011745088063

Relevant facts and circumstances

You have recently purchased a two bedroom unit being your principal place of residence.

You intend to let one of the rooms to a friend.

Your friend would have access to the living areas, bathroom and kitchen.
There will not be any formal agreement and no minimum time period and your friend is free to leave at any time.

You are considering charging your friend an amount per week being an amount that your friend can afford and that would contribute towards your household costs (including interest on your mortgage).

This amount does not cover half of your expenses of electricity, gas, rates, water, body corporate and mortgage expenses.

The amount being charged is lower than the commercial rate being asked for similar units in the area.

Question 1

Are the payments you receive from a boarder assessable income?

Answer

Yes

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes all ordinary income derived directly or indirectly from all sources.

Rental income is regarded as income according to ordinary concepts and it should be included in the assessable income for the landlord.

Taxation Ruling IT 2167 states that ordinarily, where a taxpayer lets others use his/her property, whether wholly or in part, whether at arms length or otherwise, the amount received in return is assessable income.

It is only in limited circumstances where the amounts received would not be considered income. An example of such a situation occurred in the case FC of T v. Groser 13 ATR 445: (1982) 65 FLR 121;82 ATC 4478. In that case the taxpayer permitted his invalid brother to live in a house which the taxpayer owned. The taxpayer arranged to receive his brother's invalid pension so that he could use the moneys to provide for the brother's maintenance. It was arranged that $2 per week would be deducted for rent of the taxpayers' house. The Supreme Court viewed the money received by the taxpayer as not being received by way of income, but rather to provide a fund to ensure the proper care of the taxpayer's brother.

IT 2167 considers the consequences of different rental income producing situations including the arms length letting of an identified part of a residence, for example, a bedroom, with access to general living areas. In this type of arrangement the rent payable may cover variable or running costs such as electricity and heating or the tenant may be required to pay, in addition to rent, separate amounts towards variable or running costs. This type of arrangement would also cover situations where board and lodging is provided.
The ruling states that in these types of arrangements, the rent or amount for board and lodging received is assessable income. Also, where the tenant lodger is required to make a separate contribution to specific variable or running costs such as heating or electricity, this amount is also considered to be assessable income. This is because the separate contribution represents part of the reward of the owner letting out part of his/her residence. If the arrangements are such that the separate contribution is made on a precise sharing of costs basis the assessable income will be offset by allowable deductions. If the separate contribution is a fixed amount income tax deductions will be allowed for the part of the variable or running costs attributable to the tenant/lodger's use of the relevant facilities.

Paragraph 18 of IT 2167 states that where the owner of a residence permits persons to share the residence on the basis that all occupants, including the owner, bear an appropriate proportion of the household costs actually incurred, such as food and electricity, these arrangements are not considered to confer any benefit on the owner and are not considered to be assessable income.

Household costs are generally considered as being running expenses for maintaining or keeping a house such as electricity, gas, food, water, telephone and cleaning.

In your case, paragraph 18 does not apply as your friend will not bear an appropriate proportion of the household costs actually incurred. Your friend will pay you a weekly rent, part of which represents a contribution to household running costs.

The amount charged will be a contribution to your costs that includes your mortgage interest, body corporate, council rates and running costs.

It is considered that your situation will fall within the category of 'an arms length letting of an identified part of a residence'. Accordingly, the amounts received by you are assessable income.

 

[mamie]

yeah i should probably contact the ATO.

to answer your question i think i would be considering it kind of like help to pay the mortgage which would probably be considered rent.
I suppose it means that i would have to go through all the rigmarole of considering a portion of the property an IP and a portion my PPOR. Any idea what ratio would be good? (Place would probably be ~500-550k and i'd be planning on charging about $150/wk rent which is a discount, but i dont mind helping out a friend. i'd need to borrow about 350-400k. Havent chosen a place yet, so i'm not sure of the likelihood of capital gains)

I suppose all the IP discounts eg negative gearing, will be on a pro rata basis and then if in the end i finally go to sell the place, i'd have to pay CGT on it on a pro rata basis too?
I did the CGT calculator on the ATO website and it came up with something like 5% of the capital gain will be subject to CGT. That's not too bad. but then i put in different dates and it doesn't seem to be giving consistent results, so i dont think i can trust it.

 

[Terry_w]

yeah i should probably contact the ATO.

to answer your question i think i would be considering it kind of like help to pay the mortgage which would probably be considered rent.
I suppose it means that i would have to go through all the rigmarole of considering a portion of the property an IP and a portion my PPOR. Any idea what ratio would be good? (Place would probably be ~500-550k and i'd be planning on charging about $150/wk rent which is a discount, but i dont mind helping out a friend. i'd need to borrow about 350-400k. Havent chosen a place yet, so i'm not sure of the likelihood of capital gains)

I suppose all the IP discounts eg negative gearing, will be on a pro rata basis and then if in the end i finally go to sell the place, i'd have to pay CGT on it on a pro rata basis too?
I did the CGT calculator on the ATO website and it came up with something like 5% of the capital gain will be subject to CGT. That's not too bad. but then i put in different dates and it doesn't seem to be giving consistent results, so i dont think i can trust it.

You must have missed the post above by coasty. Have a read.

If you are renting out one bedroom of a 2 bedroom unit it is likely 50% of the capital gain will be assessible income. If you are renting out for less than market rates then only a small portion if expenses will be deductible, less than 50%. So it will be a double whammy. Minor deductions along the way, full cgt on 50% of the property. Also less than market rent.