Renting to a Family Member

[Bangers]

Hi,

What is the legislation in regards to renting an IP to a family member? Possibly at a discounted rate? With the intention to still negative gear.

My little brother has just turned 18, and needs a place and for his Uni, one of my IP's is perfect for him. (I only have 1 IP).

Rent currently at $280. I'm sure I could get $300, but I don't mind giving it to him for $250, possibly $200.

The question also includes me being the Property Manager. The reduced risks of him being a family member, to myself outweighs the Property Manager/Lower Rental income.

Thanks,
Matt

 

[alexlee]

The reduced risks of him being a family member, to myself outweighs the Property Manager/Lower Rental income.

You really think so? About the reduced risks, I mean? Sounds like increased risk, to me.
Alex

 

[Bangers]

You really think so? About the reduced risks, I mean? Sounds like increased risk, to me.
Alex

Valid point, but risk aside, I was hoping to find out about any small points I should into where the law possibly changes for family members? For example, assuming afford ability wasn't a problem, is there anything stopping me from renting it to him for $1?

Thanks,
Matt

 

[steveadl]

I don't think any legislation would limit you as far as renting to a family member goes.

However, I would strongly urge you to make sure you are both happy with the arrangement. So many of these types of arrangments go bad after a while and end up breaking friendships.

For example, I would say upfront to him something like "I'll give you $50pw discount to the market rent, but that still rises every year."

eg. now market rent is $300 so he get's it for $250.
Next year if you determine that market rent has gone to $330pw - he get's it for $280pw.

The last thing you want is your brother resenting you when you put his rent up because he thought it would be $250pw for good.

There is also no point in hurting yourself financially this way, especially if you plan on buying more IP's in the future. Brother or not, the bank will want to see your rental income, and if it's too low, you'll have problems with your DSR.

 

[skater]

Firstly I am not an accountant, & I suggest that you ask this question of your own accountant. I also haven't gone looking for the answer to the question as I am answering from what I recall of previous posters with a similar dilema.

I think if you trawl through the ATO legislation you will find that it needs to be rented out at market value. If it isn't you are deemed to be renting it at market value. If, however you discounted the rent by the amount you would pay for a PM, you might get away with it.

 

[alexlee]

Say market rent was $300pw and you want to give him a discount of $50. Just make sure the lease is signed for $300, he actually pays you $300pw so that the paper trail shows 300pw. Then just slip him $50pw cashback under the table.
Alex

 

[MarkB]

Don't turn your brother into a charity case.

*If* you do rent to him, have a written lease in place (to protect both parties) and rent it as close to market rent as practicable and keep it a simple arrangement (money back under the table is not as simple as it sounds).

M

 

[geoffw]

Say market rent was $300pw and you want to give him a discount of $50. Just make sure the lease is signed for $300, he actually pays you $300pw so that the paper trail shows 300pw. Then just slip him $50pw cashback under the table.

So Bangers has to declare $300pw income on tax, but only effectively gets $250?

 

[Bangers]

So Bangers has to declare $300pw income on tax, but only effectively gets $250?

Geoff, that is correct. If I'm getting $250, I want to negative gear the full $250.

I'm coming from the angle, I want maximum tax gain while still giving him a discount.

 

[s_t]

I suspect Bangers was wanting it the other way around - $250/week declared, plus a weekly pizza or something The rent wont be a deduction for his brother so it should matter to him.

 

[wylie]

Friend of mine is married to a chap who bought his mother's house when she divorced as she could not afford the loan. She rents back from him at considerably reduced rent.

However, he has to declare for tax purposes the rent he would be getting as if it was rented at market rates. I don't know what would happen if he didn't do this, and I don't know whether it is something his accountant suggested. I am having dinner with my friend tonight, so I will try to remember to ask her.

Wylie

 

[Melbear]

Yes, but if you're getting $250, and market rent is $320 it would be pretty hard to justify that to the ATO! As has been said, if you gave him a 10% discount - that would be the Prop Mgr fee and their 'postage' fee, and their letting fee, and their inventory fee and their fee fee, I can't see that that's an issue and can be justified with the ATO, but any more than that is asking for trouble IMO.

If he looks after the place, you would potentially save on all those pesky little things that the tenants demand get fixed cos they can. Not to say that you let the property fall apart, but there are some things that you've really got to wonder about.

 

[LynnH]

I think if you trawl through the ATO legislation you will find that it needs to be rented out at market value. If it isn't you are deemed to be renting it at market value. If, however you discounted the rent by the amount you would pay for a PM, you might get away with it.

Bangers

As Skater says, it is OK to rent it out at market value less management fees. We do this with one of our properties. If you do this, I would suggest that you have a lease document signed and don't even think about claiming any expenses unless you have receipts or other documentation acceptable to the ATO.

However - according to my accountant - if you have the IP negatively geared and rent it out at less than the MV adjusted for PM fees, your deduction is limited to the amount of rent you receive. For example, your rent is $8K and interest/expenses total $14K - then you can only claim deductions up to $8K and you just have to 'wear' the rest yourself.

This is a very simplified explanation - before you go down this path, may I suggest that you consult a property-savvy accountant who will advise you what you can and cannot do when renting IPs to family members.

Cheers
LynnH

 

[yo yo ma]

There is a post with the same title here. According to the ATO you can rent a property at less than commercial rates, however, there is a limit to the deductions you can claim (see page 8 of link).

It is also discussed in IT 2167 which says:

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.

Seek clarification with your accountant.
Steve

 

[coolie21]

Be very careful. I have been through this, and it turned out none too pretty, when the family member (who actually never paid me ANY rent) thought he was doing me a favour by occupying the unit ('looking after it' for me). The unit doubled in value and his view was that as we had only bought it to help him out (his wife had put him out) he was entitled to 'his share' of the increase in value, or should be allowed to purchase it off us at the original purchase price.

I would strongly advise that you find another tenant at $300 a week for your IP and slip your brother $50 a week to help him out renting some other place.

Once bitten twice shy.

 

[Body-By-Jake]

If Market Rent was $300pw & he paid $300pw & you gave him a $50 cash rebate each week, how's the ATO going to find out. You signed a lease with him at market rent at $300 per week. End of story I would think. No one from the ATO on this forum I hope!!!

 

[alexlee]

If Market Rent was $300pw & he paid $300pw & you gave him a $50 cash rebate each week, how's the ATO going to find out. You signed a lease with him at market rent at $300 per week. End of story I would think. No one from the ATO on this forum I hope!!!

You just have to declare the $300 as income, AND pay tax on that. Assuming a 30% tax rate that means you 'lose' $50 to the brother AND pay an extra $15 in tax. (This is actually what I meant when I said contract for $300 and give him $50 under the table: I meant you really declare the $300 as income).

There's no law against renting to an unrelated person for under market (that's just the landlord being stupid). However, renting under market to a family member is a bit iffy.

Bangers, there are better ways to help your brother. How about putting that 'rental discount' you're going to give him into a savings match or something? He saves $50 a week, you match it, and that goes towards his first IP or whatever.
Alex

 

[GoAnna!]

Bangers,

You say its your only ip? Have you actually let it out to a market rate tenant? I was just wondering if you have any experience just being a conventional landlord.

 

[want2bewealthy]

One of the rules I learned early on was "do not rent to a family member or friend" for obdvious reasons, unless youre sure it cant possibly result in conflict.

 

[geoffw]

Geoff, that is correct. If I'm getting $250, I want to negative gear the full $250.

I'm coming from the angle, I want maximum tax gain while still giving him a discount.

I guess the difficulty here would be determining what "market value" is.

If you did your research, you would find a range of rents. So if you found places ranged $250 to $350, take the three bottom rents as proof that you are charging market value. Rents for established properties are likely to be lower than rents being advertised.

It may be worthwhile to have a PM manage the properties in order to reduce the risk of renting to relatives.