All Topics / Help Needed! / Renting a house FROM your tennant

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  • Profile photo of dah1505dah1505
    Member
    @dah1505
    Join Date: 2011
    Post Count: 2

    Hi, I'm new here, had a brief look round and couldn't find the answer to my question, apologies if I missed it.

    I have a simplified sort of hypothetical question:
    – My family and my sisters family are both looking to buy a house
    – We find an area both like the look of and buy adjacent blocks.
    – We build identical houses on the blocks and furnish them identically.
    – Finance is the same, so the monthly payments of myself and my sister are the same.

    Then,
    – I move into my sisters house and she moves into mine
    – We have standard tenancy agreements with standard conditions, we pay each other rent at the market rate. No need for a management agent but otherwise it would technically be like renting to and from anyone else.
    – We each claim the usual expenses associated with owning a rental property against our earnings.

    My questions:
    – Is this possible / legal / likely?
    – Does this happen? And does it have a Name?

    Thanks

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856

    I’d suggest buying/building a pair of duplexes. You may consider using a trust to hold both properties.

    Profile photo of michaelandre70michaelandre70
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    @michaelandre70
    Join Date: 2009
    Post Count: 34

    Have not heard of such thing actually. Assuming that you build the house out of loan, so you need to pay for the repayment, which I assume you will make out from the rent you receive from your sister and same goes for your sister. so why not stay in your own house and make the repayment out of the money that you would have to pay as rent otherwise.

    I hope I have not misunderstood what you posted?

    Profile photo of Matt.BMatt.B
    Member
    @matt.b
    Join Date: 2010
    Post Count: 9

    It sounds legal enough, but you might want to chat to a lawyer just to make sure, but two things immediately spring to mind.

    1.  Tax deductions – doing it the way you suggested you would obviously be able to claim interest, repairs, etc. on tax so that may make the proposal quite attractive depending on your circumstances, and that of your sister.

    2.  Capital Gains Tax – by renting out the property they both become an income producing asset and will be subject to CGT at time of sale, whereas if you lived in your own and used the rent money you would pay to pay off your loan (as Western suggested) the house would be exempt from CGT.

    So I suppose you have to weigh up what you plan on doing in the short, medium and long term with both properties, and also what your projections are for growth in the area.  Either one may work out to be the better option depending on your goals and circumstances.

    Hope that helps.

    Matt.B
    http://www.realestateinvestar.com.au/matthew

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
    Post Count: 3,544

    The obvious questions is why – I would hazard a guess as this is being contemplated for tax minimisation/avoidance purposes..

    Think carefully about the answer because Part IV of the tax act will have some bearing on this.

    Part IV deals with tax avoidance and reasons for taking certain actions.

    If your reasons are other than to avoid paying tax you would need to do everything at market rates as a minimum.

    Profile photo of luke86luke86
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    @luke86
    Join Date: 2010
    Post Count: 470

    I would say it is legal, as long as you are paying market rent. Better check with an accountant first though. I have heard of schemes like this in various books, I think Jan Somers or Margaret Lomas recommended it.

    One thing you could do is to both move into your own houses for say two months before you switch and rent each others house out. This way you can still claim CGT exemption under the 6 year rule.

    Luke.

    Profile photo of lbluedentolbluedento
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    @lbluedento
    Join Date: 2009
    Post Count: 98

    I have friends (let’s say A & B) A bought the house that B wanted and rented it to them and B bought the house that A wanted and rented it to them. This way they can claim the loss against their tax and any repairs are deductible. Of course the houses were of a similar price. They said it worked really well.

    Profile photo of dah1505dah1505
    Member
    @dah1505
    Join Date: 2011
    Post Count: 2

    thanks for the replies all, I've been considering this as a tax minimisation strategy, asked the question here to see if it was a definate non starter.

    Seems like I may look into it further and get professional advice.

    Good point on the CGT too.

    Thanks, Dave

    Profile photo of Adam.FAdam.F
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    @adam.f
    Join Date: 2011
    Post Count: 6

    Don't see why this would be a problem at all if set up correctly as above with fair market price rent etc, the idea was even aired on a current affair with that Paul Clithero or what ever his name is from the money magazine.

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
    Post Count: 3,544

    Ignore Part 4A at your own peril.

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