All Topics / Legal & Accounting / Renting rooms in a house

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  • Profile photo of nemonemo
    Member
    @nemo
    Join Date: 2004
    Post Count: 38

    Hi everyoneI was wondering whether you can give me some advice on the following situation. We have recently acquired a large house on semi rural land. We are keen on renting out part of the house in order to be able to claim some of the costs and use the financial burden – interest, stamp duty etc.The owner who we are buying from is going through divorce proceedings and would like to rent a few rooms of the house for 6 months.What we would like to do is move into it ourselves and rent some of the rooms – say we rent 2 out of 4 bedrooms, 2 living areas and 1 garage. As we will be living in the house, all utilities will be transferred under our name but the tenant has agreed to pay 50% council/electricity and water rates.As we have a couple of other rental properties, we would be keen on managing the property ourselves – especially since we would be living in it. So would draw up a rental agreement stating what they will be using and the agreement for utilities. Regarding payment of rent, the rent they could pay is ½ of what renting the whole home would be i.e. around $400 instead of $800. How did this all sit legally and would there be any issues with the tax department?Rather than transferring funds via the bank, could they pay us in cash and us provide them with a receipt which we both sign and use that as a record of payment?? Would this be OK?Also, when they do ultimately move out, could we do the same process and rent the property out to a family member – cousin?, with the same documentation or is this dodgy??Regards Grace

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Shouldn't be a problem. But you will lose the CGT exemption on that part of the house that you produce income from. This may work out to be much larger than the small income tax savings you will make.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of nemonemo
    Member
    @nemo
    Join Date: 2004
    Post Count: 38

    Isn't the CGT only an issue if we were to sell the house at a later date.
    What if we keep it for 30 years and only rent it for 5 years??

    Grace

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    yes, CGT only applies when you have sold it. The 5 years you had rented it would be subject to CGT. I think it could work 2 ways:

    Value at time income ceased – value at start = CG

    or

    5/30 years = 16% so 16% of overall gain.

    Either way You would only have to pay tax on half of this gain if you have rented out half. You may then get the 50% CGT discount too.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of nemonemo
    Member
    @nemo
    Join Date: 2004
    Post Count: 38

    Would we be under increased scrutiny by the tax dept if we manage the renatl it ourselves by organising a rental agreement or get a family member to rent the rooms ( which is always better renting to a family member than a stranger…in most cases.
    Regarding a receipt book for the rental payments,  are some better than others? I would just place our details, the tenants details and how much they paid, and get them and us to sign it and date it and obviously keep it for taxation. We would then use the cash to go and purchase groceries and deposit or spend the rest-  so there wouldn't be a transaction trail for the funds.
     
    Grace

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    ATO would require you to substantiate expenses etc if you are audited. They will probably look more closely at private rental arragements I imagine.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of nemonemo
    Member
    @nemo
    Join Date: 2004
    Post Count: 38

    What do you mean by substantiate?
    Would the signed invoices be adequate if tenant payment was being made by cash??

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Prove.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of nemonemo
    Member
    @nemo
    Join Date: 2004
    Post Count: 38

    Sorry, I know what the word "substantiate" means but would what I've suggested above be considered adequate by the tax office as substantiation. i.e. If I have only paper invoices and cash but no transaction record.

    Grace

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Well, I would imagine so, It would be like any other transaction. You just need proper invoices,

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of nemonemo
    Member
    @nemo
    Join Date: 2004
    Post Count: 38

    Does anyone know how they would calculate how much I can claim if i rent out some rooms and how they work out the percentage claimable??

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    probably calculated on floor space used.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

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