Tax Question - Renting from my brother but I own half the property.

Hey All,
Just keen to get some users take on this. I will of course be speaking to an accountant regarding this in more detail but like to ask beforehand.

My brother and I own a property 50/50. I live in the property with my wife and my brother is renting elsewhere. I pay my brother his half of the rent ($150). So basically this property is my PPOR and is an IP for my brother.

Now for the past year since my brother moved I have been depositing him the rent infrequently. The reason for this is anytime he owes me money i just say I wont pay you rent for X amount of weeks. These events have usually been associated with the property such as rates.

So is my brother still able to claim tax deductions (interest payments, rates.etc) or because payment has been all over the place can this not be done anymore?

I also understand this is probably not the best approach and would not necessarily please the ATO so we are keen to do it correct moving forward.
 
Hmm definitely one for a good accountant to answer on how the ATO would view this.

My flatmate is seeking to do something pretty similar - he put together a signed tenancy agreement to cover his basis.
 
Reality is if ATO subjected this to scruitiny it would probably fail as a private arrangement. No rent is being paid. So deductions aren't deductible.

The ATO do ask for proof rent is being paid when related parties are involved. No rent = no income. No income = no deductions. Its easy.
 
Hmm definitely one for a good accountant to answer on how the ATO would view this.

My flatmate is seeking to do something pretty similar - he put together a signed tenancy agreement to cover his basis.

The agreement is part of it. Payment more important I might argue. Its like paying the LL in cash without a receipt. You cant later argue that you are paid up to date.
 
I don't believe (and someone can correct me if I am wrong) that you can rent a property to an owner of the property. Because you cannot be a tenant in your own property, then your brother cannot claim any of it as an IP. Trying to remember where I read this, not sure if it was one of my law textbooks or one of my property investment books.
(of course there are exceptions for companies etc)
 
I don't believe (and someone can correct me if I am wrong) that you can rent a property to an owner of the property. Because you cannot be a tenant in your own property, then your brother cannot claim any of it as an IP. Trying to remember where I read this, not sure if it was one of my law textbooks or one of my property investment books.
(of course there are exceptions for companies etc)

You can't contract with yourself. But there are 2 halves of this property.
 
Just found the old (very old now 2003) property law text book. It doesn't have much info actually in it, but it basically says that a co owner has full, unfettered and unhampered rights to a property independent of an other owners of that property. That a co owner cannot impose upon another co owners right of personal enjoyment of the property. And that an owner of a property may not be tenant of that property.
However it doesn't go into much more depth then that, and I am curious if the legal situation varies depending on whether they are joint tenants or tenants in common. Joint tenants having survivorship rights to the property, and tenants in common having severed rights.

It certainly appears that an owner has a legal right to enjoy their premises free of charge if they wish and rent cannot be imposed upon them by another co owner (although the moral issue may be different).

This has me interested now. Especially from the ATO's perspective.
 
Just some property law lecture notes:
Occupation fee

Each co-owner is entitled to occupy the whole of the property along with any other co-owner who also chooses to do the same. Accordingly, there is generally no right for one co-owner to claim an occupation fee against another co-owner who is in possession of the property. The situations in which an occupying co-owner is liable for an occupation fee are set out in paragraph [1426] of Butt.

There are 2 cases specifically dealing with this issue. In the first of these, Luke v Luke 36 SR (NSW) 310, John Luke died leaving his estate subject to a life tenancy in favour of his widow with the remainder to his two daughters in equal shares as tenants in common. John Luke?s widow died in 1915 and Laura, one of the daughters, died in 1920. From that date until the trial in 1936, Ada (the other daughter) occupied the property. In 1929, Ada was removed as a trustee of the estate and the Public Trustee appointed. In 1932, Ada Luke became a bankrupt and in the case before the Court an order was sought that the Public Trustee be authorised to sell the real estate and that Ada Luke be charged an occupation rent. After considering numerous authorities Long Innes C J in Eq. cited the matter as follows:

?The conclusion to which I have come is that the contention that the defendant Ada Luke should be charged with an occupation rent in this case is neither supportable on principle, nor established by authority, and that , in fact, the balance of authority is to the contrary.

I make the order for sale as asked, and declare that the defendant Ada Luke is not chargeable with an occupation rent.?

The matter had also been considered in the case of Leigh v Dickeson (1884) 15 QBD 60 referred to earlier. In this 1884 English case a tenant of three-quarters of a property acquired the remaining one-quarter of the property as owner. He then became a tenant in common with the lessor of the three-quarters share and continued on that basis until the lease expired some 10 years after he became a tenant in common. Correspondence took place concerning the basis of his continued occupation but no agreement was reached. After the death of the owner of the three-quarter?s share, her executors sought to recover rent from the expiration of the lease. One of the Appeal Judges, Cotton, L.J. expressed his view as follows:

?The plaintiffs have brought an action to recover rent, and the defendant by his counter-claim raises the question whether one tenant in common is liable to another for the cost of repairs.

I think that the plaintiffs are entitled to succeed in their claim for rent. It has been urged that one tenant in common cannot recover against another for rent, for either of them may enjoy the possession. But in the present case the defendant, although he himself was tenant in common, had possession of the whole of the house by virtue of a lease from his co-tenant in common. A correspondence ensued, as to the terms under which he should remain in occupation of the house. Under these circumstances, I think that the defendant must be considered as holding exclusive possession of the house upon the terms of the lease, and therefore, that he is liable for rent at the same rate as was reserved by the lease.?

?As to the claim for improvements, it has been urged that no tenant in common is entitled to execute improvements upon the property held in common, and then to charge his co-tenant in common with the cost. This seems to me the true view, and I need not further discuss the question as to improvements. As to the question of repairs, it is to be observed that when two persons are under a common obligation, one of them can recover from the other the amount expended in discharge or fulfilment of the common obligation; but that is not the position of affairs here: one tenant in common cannot charge another with the cost of repairs without a request, and in the present case it is impossible even to imply a request.?

Improvements are not limited to physical improvements and can include mortgage payments because mortgage payments increase the equity in the property and the amount available for distribution.
 
Hey Rugrat,

Sounds like this one has got you interested! :)
The thing with our scenario is I am not disputing the rent, I definitely want to pay my brother rent. The alternatives is we sell the property or I also move out and rent and this becomes both our IP.

I have ran the numbers on this scenario and the benefit is with me staying in this property. Now so long as I pay my brother fair market value rent then it is also a favorable agreement for him as it guarantees no vacancy and also the important fact that the half owner is the reliable and trustworthy tenant.

To Paul,
I do think we have stuffed this up a bit but I just checked my bank and there has been 29 payments for the last financial year totaling $3155 of $7800 (Rent is actually $140 sorry). This means on 29 occasions for the financial year I did not make a deposit for rent BUT I could prove to the ATO that this was for property related expenses such as rates and maintenance?

I will speak to my accountant about this but moving forward do you have any recommendations for how to correctly do this? I know this might sound crazy but is it worth us getting a property manager? If not do you think it would be satisfactory just to ensure I make the payment into his back everyweek regardless of the money he may owe me for something?
 
Just found the old (very old now 2003) property law text book. It doesn't have much info actually in it, but it basically says that a co owner has full, unfettered and unhampered rights to a property independent of an other owners of that property. That a co owner cannot impose upon another co owners right of personal enjoyment of the property. And that an owner of a property may not be tenant of that property.
However it doesn't go into much more depth then that, and I am curious if the legal situation varies depending on whether they are joint tenants or tenants in common. Joint tenants having survivorship rights to the property, and tenants in common having severed rights.

It certainly appears that an owner has a legal right to enjoy their premises free of charge if they wish and rent cannot be imposed upon them by another co owner (although the moral issue may be different).

This has me interested now. Especially from the ATO's perspective.

You are looking at it from a property law point of view not a tax law point of view.
 
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