Investment Property Question

forever saving on 12/06/2014 - 11:42

Hi guys, my question is about the tax treatment of a property in a particular scenario/scenarios.

Say I buy a property and am on a Mortgage.
It's a 2 bedroom apartment.

If I rent out both bedrooms, it is an investment property, therefore I can claim the interest as tax deductible. It also means Capital Gains Tax is payable upon selling the property.

If I live in the apartment, it is my primary place of residence, therefore I will not pay Capital Gains Tax after 1 year of living there.

If I have a tenant there, then I decide to stay there as a tenant also, can it still be treated as an investment property?
The idea is to claim a higher tax deduction since the rental income would be half, but this is only possible if the property is treated as an investment property. We are trying to keep the property to live in therefore having a CGT concession isn't important at this stage.

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If the above is not possible:

Say I have a trustworthy friend who is in the exact position I am in. We both want to buy properties but instead of buying the one we wish to live in. We buy the property for each other, therefore we are each renting legitimately.
This means that each apartment can be treated as an investment property as there are only tenants in the property.

We charge each other low rents, so that we can claim higher tax deductions. When the properties are paid off we transfer the ownership in each others names.

TL;DR How to get property you want to live in treated as an investment property so that you can take advantage of the tax concessions?

Financial

Comments

  • p1 ama on 12/06/2014 - 11:52
    +7

    TL;DR How to get property you want to live in treated as an investment property so that you can take advantage of the tax concessions?

    The truth is, you can't. If you try hard enough, you can find loopholes, but they are inconvenient and you'll probably raise flags with the ATO who will come around and bust you.

  • Smulder on 12/06/2014 - 13:58
    +3

    Renting to a friend of family member at significantly below market value won't be accepted by the ATO. They will require you to substitute your 'mates rates' rent with market value rent for income purposes on your tax return. In addition, if they discover you have done it purely to avoid tax, you may be charged penalties and interest under the anti-avoidance provisions.

    Buying a property for each other will also result in both of you having to pay capital gains tax on the eventual transfer, as well as stamp duty, which will likely erode most of the benefit you have gained from the rental deductions.

  • leiiv on 12/06/2014 - 17:31

    I am also curious on the tricks used by people who buy a lot of investment property to minimise the capital gain tax when they sell the property at the end of the day.

    • jason101 on 12/06/2014 - 20:54

      Don't ever sell, simply use the accrued equity as the "deposit" (in non cash terms) to buy more property = no capital gains tax issues ever.

  • donga100 on 12/06/2014 - 19:44
    -2

    Just buy the house that you want and live in it. Then have your friend sign a lease for your property and you sign a lease for their property. You don't actually need to live there, just arrange to meet occasionally to collect your mail as you will want to use your friends house as your mailing address for official record keeping purposes.

    • p1 ama on 13/06/2014 - 09:36
      +4

      I'm not sure if you realise that this is actually illegal and constitutes fraud. You can get fined and sent to court for doing stupid stuff like this.

  • Blugok on 12/06/2014 - 20:08
    +1

    I asked the same question to my tax accountant a few years ago.
    He said it was possible to rent to each other, as long as the two of you were not in a marriage or de facto relationship, in order to claim the property expenses as deduction.

    That was back in 2009. Best to check with your tax accountant.

    • Baghern on 12/06/2014 - 20:31

      yep you can do it…. but what they find out in an Audit is another thing.

      They don't have to prove you broke the law, but attempted to subvert it.

      You can get away with this… anything if you have million dollar accountant and lawyers to back you.

      • cloudy on 12/06/2014 - 21:39

        Correct baghern, u can report what you want. But if there is no economic substance in what you are doing other than to avoid tax, there is a catch all clause in the legislation, I believe is part IVA, that basically says any scheme thats only purpose is to avoid tax is a no no.

  • backpaqer on 13/06/2014 - 08:11

    Also mortgage treatment is different for investment vs residence. As for minimum rent, there will be a rate that is considered reasonable for the property. If you get audited, you could argue that you have reduced the rent to entice a desirable tenant, lack of certain facilities etc…but push it too far and that big bushy ATO eyebrow will get raised. I recommend always being conservative. Got audited once and so my accountant went into fine detail and the ATO had to cough up a few extra hundred bucks in my favour.

  • theo96 on 13/06/2014 - 10:44

    We have issues like this because our tax laws are fundamentally flawed (or simply biased towards investors through negative gearing). For example, in the US the interest on your residence (and not investment properties) is tax-deductible. So if you only want to buy a property to live in, the interest on the mortgage is tax-deductible and you don't have to resort to arrangements described here.

    Our tax laws are part of the reason why Australia property prices are among the highest in the world, by encouraging property "investment".

    • p1 ama on 13/06/2014 - 12:52

      So if you only want to buy a property to live in, the interest on the mortgage is tax-deductible and you don't have to resort to arrangements described here.

      The US tax system is vastly different to the Australian tax system. This isn't a fair comparison at all.

      Either way, your interest repayments on your primary residence should not be tax deductible, it is a consumption good, just like the interest paid on your car and the interest paid on your personal loans.

  • forever saving on 18/06/2014 - 10:32

    Appreciate the responses thanks. A few mixed responses but more votes from people saying it can't be done

    • p1 ama on 18/06/2014 - 21:02

      Always going to be the case, it's illegal to evade tax. I'm not a taxation accountant, but there are laws which pretty much state that you are not allowed to perform an action which is solely for the purpose of evading tax.

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