Renting to yourself

W

WebBoard

Guest
From: Andrew Scott


Back in the depths of the archive, there was a discussion about renting a property to yourself rather than owning it as a home.

The benefits of doing this are that you can claim depreciation (even on furniture if it's a furnished property you're renting) and tax deductions on outgoings, in return for forgoing the captial gains tax exemption and any First Home Owners Grant.

I am looking at purchasing a property to rent, and am considering myself to be a tenant. However, the advice I'm receiving from my tax advisor and property manager are that at the very least the tenant and owner need to have different names, and maybe even then its not sufficiently arms-length.

In the archived discussion, it didn't really go into ownership structures for this sort of thing. Is "special" ownership necessary for renting to yourself?

Andrew Scott
 
Last edited by a moderator:
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1.1
From: Andrew Scott


Those cases are very interesting, but they describe a situation where a trust owned a property that was being rented to the director of the company that was the trustee.

I'm interested in the simple situation where a person owns a property, and they want it to rent it to someone. They happen to consider themselves as someone that might want to rent it for a while.

Andrew Scott
 
Last edited by a moderator:
Reply: 1.1.1
From: Robert Forward


Hi Andrew

I believe that it all comes down to what way the ATO believes the deal is being done. For example the deal MUST BE "At Arms Length". So if you decided that you would like yourself to rent your property then the ATO will see this at NOT being "At Arms Length", if you get what I mean.

You could always ask the ATO for a private ruling though. But best to check this info out with a qualified accountant.

Cheers
Robert

The Sydney "Freestylers" Group Leader.

PS: "Be Not Afraid Of Growing Slowly, Be Afraid Of Only Standing Still."
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1.1.1.1
From: Sergey Golovin


Andrew,

If you are running business form your own home or office to look after your investment portfolio, then you probably could. But if you just want to rent back to your self as owners occupy very same residential property - you might not get anything back from tax office.

Well, give it go and let us know if you had any luck please. Would be nice to know what else is possible out there.

Serge.
 
Last edited by a moderator:
Reply: 1.1.2
From: Duncan M


>Those cases are very
>interesting, but they describe
>a situation where a trust
>owned a property that was
>being rented to the director
>of the company that was the
>trustee.

Similar concept, and the intent was the same. A taxpayer was seeking to write off all of the costs of what was essentially a principal place of residence. All a bit on the nose really, much like what you're attempting to do. Seek the known legal ways of minimising your tax and leave the exotic interpretations of the rest of the tax law to those people who can afford the legal representation when they eventually get challenged.


Duncan
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1.1.2.1
From: Andrew Scott


Duncan,

I'm sorry if you got the wrong impression of my intention. What I'm trying to do is figure out where I can rent from. What I'm not trying to do is minimise tax, optimise tax, or do anything else tax related.

Hence my decision is not "should I live in this property as an owner or a tenant" but "should I rent this property or that property"?

Given that I will be renting *somewhere*, and *someone* will be renting the property in question, there is zero consequences to the ATO revenue-wise, assuming they allow it. However, I am repeatedly getting the same advice: that they won't allow it.

Andrew Scott
 
Last edited by a moderator:

Sim

Administrator
Reply: 1.1.2.1.1
From: Sim' Hampel


If it is suffuciently "arms-length" then you should be okay. What this actually means, you will need an expert to tell you (as has already been said).

There are things like using an external property manager to manage the property for you that can help keep the transactions and paper trail clean and obvious.

However, when you weigh up the costs versus the benefits, you will most likely find that from a financial point of view it is really not worth it (especially when capital gains discounts for PPOR is taken into account).

So if you have a property you own via a trust and you want to live in it then live in it. No need to pay yourself rent. No need to risk the wrath of the ATO. If the trust needs help paying the mortgage, then that's another issue and something that your accountant can help you with. Exactly the same scenario as me owning my own home in my name, then deciding for asset protection purposes to move it into a trust while still living in it.

But you mentioned that you wanted to rent a place from yourself held in your own name rather than in a trust. For starters if renting from your own trust is not arms length enough for the ATO then renting from your own personally held house is definately not going to work. And... like I already said, the costs of contriving a situation like that rather than just living in it as a PPOR will most likely outweigh any possible benefits you might think you will get.

Now if it's a PPOR issue you are trying to get around (you haven't actually told us why you are trying to achieve this scenario you mentioned), then it's a non-issue, as you can make an election on which of your properties is to be considered your PPOR, even if you are not living in it. Of couse there are time limits involved for how long you can live elsewhere and still claim the PPOR exemptions but it's still there.

 
Last edited:

Sim

Administrator
Reply: 1.1.2.1.1.1
From: Sim' Hampel


We need a glossary for all the newbies don't we.

PPOR = Principal Place of Residence... aka the house you own with the intention of living in it as opposed to an investment property.

 
Last edited:
Reply: 1.1.2.1.1.1.1
From: Marina .


Just wondering would it be possible for a partner to rent from the other partner. The rent would be market rent and it would go through a realestate agent of course.


This is just a thought leading from the discussion on RENTING TO YOURSELF.
 
Last edited by a moderator:

Sim

Administrator
Reply: 1.1.2.1.1.1.1.1
From: Sim' Hampel


But why would you want to do that ? What are you trying to achieve ?

Think about it... you are paying between 5% and 10% of the rent you pay in management fees alone to the property manager... and then you pay tax on the rental income, which was yours in the first place and had already paid tax on it.

Let's work it out...

Say you earn $1000 for a weeks work.
Now roughly speaking you'll keep about half of thist so you actually pocket $500.
Now you pay, say, $250 in rent to rent your own house via a property manager. This is NOT a tax deductible expense.
Then the agent takes 7.7% (inc GST) of your rent in management fees. Lets round it up to 10% to cover other fees and such. So they end up paying you about $225 of your rent.
You then pay tax on that rental income at your marginal rate, lets say half again, so you get to keep about $112 - you've been taxed again on it !.
So you've just spent about $138, or 13.8% of your gross income to contrive a system to try and save tax.

Now, I am using very rough figures and have not started to take negative gearing into account. But already I say... why on earth do you want to do this ?

If someone wants to do a more accurate analysis and try and convince me that the numbers are actually in your favour, then please do.

 
Last edited:
W

WebBoard

Guest
Reply: 1.1.2.1.1.1.1.1.1
From: Andrew Scott


Ok, Sim, I take your challenge. :)

Case 1 (as you described it)..
Rent an apartment that you own (assuming that the ATO approves of this arrangement). You pay $250 in rent, get back $112 in rental income after tax.

Case 2 (a more common situation)..
You have a rental property rented to someone else for $250 a week, but you pay $250 a week rent for the place that you live in. The place you are renting and the place you are renting out are different. Again, you pay $250 in rent, and get back $112 in rental income after tax.

Note that you are *no worse off* doing case 1 than doing case 2. And, there are many sensible financial arguments for doing case 2 rather than other things.. see the "Buy vs Rent?" thread elsewhere.

However, there are non-financial reasons why you may prefer case 1 to case 2, eg. you completely trust the landlord, you completely trust the tenant, you like the property (in a good location, near shops, schools, etc.), the landlord knows in advance when the tenant will move out, the tenant may be available to rent the property from the first day, no need to hassle with finding a tenant, no risk of ending up at the tenancy tribunal, the landlord gets to know their property better for later leasing out, the tenant may not have to sign as strict a lease as elsewhere, etc.

Hence, although there is no financial advantage in renting to yourself, you may still rationally want to do it.

Andrew Scott
 
Last edited by a moderator:

Sim

Administrator
Reply: 1.1.2.1.1.1.1.1.1.1
From: Sim' Hampel


Sorry Andrew, I think you missed my point (which I admit I didn't actually spell out).

My point is that there is a third option.

Forget the whole idea of renting from yourself. If you live in a place that you own you DON'T PAY RENT.

You did say in one of your posts: "What I'm not trying to do is minimise tax, optimise tax, or do anything else tax related".

So you live in a house as an owner occupied property. Simple.

This means that if it was an IP for part of the year, you have to apportion the deductions at tax time, but it's not that hard and your accountant can help you with it.

And when you move out and it turns back into an IP then you do some more apportioning and away you go again.

You also get to fiddle with the figures for capital gains if you eventually sell the property, as you get a 50% discount for the period it was your PPOR (occupied or just elected).

This is exactly the situation we are in with our own PPOR. We bought it to live in, but then moved inter-state with work. It is now rented out as an IP. When we move back home one day, we will boot our tenants out and move in to our house again. Unless we have enough money to be able to buy a much much better house by then that is ;-)

So am I still missing your point ?

 
Last edited:
W

WebBoard

Guest
Reply: 1.1.2.1.2
From: Terry Avery


Andrew,

You can rent from yourself if you like as someone who needs to rent.

You as landlord, however, cannot claim anything as a result of that
transaction as a deduction as you are not at arm's length. You can rent to
family members if you go through an agent (arm's length) and they pay fair
market rent. Then deductions are allowable. Is this where you are heading?

Cheers

Terry
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1.1.2.1.2.1
From: Jeanette .


The Tax Office puts an objective test on whether you enter into a scheme to obtain tax benefits. It doesn't matter what you say your intention is. They apply the objective test so it is unlikely that they would believe you that you had no intention of obtaining a tax benefit.
 
Last edited by a moderator:
A

Anonymous

Guest
Reply: 1.1.2.1.2.1.1
From: Anonymous


Exactly Jeanette!

If you as a natural person are the owner of the property, any leasehold interest you attempt to carve out of your freehold will be a nullity because you already hold the whole estate.

It is a legal impossibility to be both owner of a property and the tenant in the same legal capacity.

That is not to say of course that property can't owned by a natural person or company as trustee for the benefit of a natural person and that natural person happens to be the tenant...but then you get into the ATO "smell test" ie is this objectively for the purpose of avoiding tax (ie claiming household expenses as business deductions when they are purely private expenses). Those subjective issues you mentioned about knowing when and what the tenant (ie you) will do are completely spurious. I wouldn't recommend trying that on with the tax office if i were you! ;-)

You really are trying to make this all too complicated...just live in the darned house and take the ability to sell free of capital gains tax!

As Les says "eschew obfuscation!"

ps. get your own advice blady blah blah...
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1.1.2.1.2.1.1.1
From: Anonymous


There are two answers:
the first is why do it. I, say, have extensive repairs to do to the house. I need a new balcony, swimming pool etc. Then I want to rent the house to get the depreciation on such items as an expense. In other words the expenses need to be greater than the "notional" rent.

the second is to whom do I rent it if I can't rent to myself. Answer - anyone else. Invent several tenants, say three fictitious tenants, then at least 3/4 of the above NET expenses are claimable. Obviously two things need to be considered - are there Net expenses after the "notional" rent income. Second the saving in tax must exceed the likely capital gain (when you sell the house).

Comments please
 
Last edited by a moderator:
Reply: 1.1.2.1.2.1.1.1.1
From: Michael G


Hi,

I don't like the use of "fictional" anything. You can have a small home business lease a portion of your place maybe, or take borders, but there's no need to make things up. That's a recipe for disaster.

Michael G.
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1.1.2.1.2.1.1.1.1.1
From: Donna Larcos


I think the partner to partner thing is
interesting. I.E> Bob B buys a unit and
rents it to Mary J. An agent is employed to
collect rent etc. Bob and Mary just happen
to live together at that address (shh).
Interest, tax-deductible and negative
gearing on a new property would wipe out
the tax payable on the rental income. I
wouldn't want to be home if the tax man
came knocking at the door but........
 
Last edited by a moderator:
A

Anonymous

Guest
Reply: 1.1.2.1.2.1.1.1.2
From: Anonymous


"Fictional persons"

ILLEGAL, FRAUD, TAX EVASION, AUDIT, FINES, JAIL & BIG LEGAL FEES are those enough comments?
 
Last edited by a moderator:
Top