Can you rent your own investment property?
You’ve purchased an investment property and you decided that you now want to move into
that investment property, well can you go ahead and rent that property to yourself and
therefore claim the tax deductions that you need to claim and want to claim as an investment
property. I’m going to be discussing the tax implications
of that and whether or not you can do it in this videos stay tuned.
Hi, I’m Ryan Mclean I’m from positivecashflowustralia.com.au where we help people like yourself find and
invest in positive cash flow properties all over Australia. If you are interested in finding
positive cash flow property or getting to learn more about investing in property then
heads over to positivecashflowaustarlia.com.au our short link is pca.im if you are on your
mobile phone and you don’t want to type it up.
Okay can you rent an investment property to yourself, the short answer is no, and the
reason I say no is that if you own the property in your own name, then renting it to yourself
as the same name is not going to fly with the ATO.
The longer answer is mainly because there is something called at arm’s length, which
we will discuss in more detail, first let’s look in more detail about renting it from
your own the property from your own name and renting it to yourself, the ATO will; look
at transactions and they will look at the purposes of transaction, you owning and leaving
in a property that the ATO that’s considered to be a personal expense, it’s not considered
to be a business expense, not considered to be an income producing expense, which is what
makes things tax deductible. If we purchase an investment property we rent
it out to someone else well that’s generating us income and because its generating us income
and we can therefore deduct the expenses that are associated with that because we need to
pay those expenses in order to get that income, just like a business has business expenses
and needs to pay those in order to make a profit and it can claim those as tax deductions
and they’re just pay tax on their profit. Okay if you are renting it from yourself to
yourself your owning the home and you are leaving in the home therefore it’s going to
be a personal expense no matter which way you try and spin it and the ATO is going to
see that as a personal expense and if you try and do that as investment property well
then a red flag is going to go up at the ATO and your highly likely to get audited.
With this situation if you still don’t believe me then I do suggest you go on to see a professional
tax accountant about this and they can discuss with you in more detail.
Let’s look at arm’s length which is a clause that people have used to rent properties to
themselves in a roundabout that way, this is something that I do suggest you speak to
a tax accountant about because the term at arm’s length is not clearly defined you need
to speak to them about it, this is for general educational purposes only and it’s not me
advising you to go ahead and do this. At arm’s length means that if the property
you rented the person renting it and the person they are renting to at arm’s length to each
other then they are some situations where this can be legal, I say some situations I
say can be legal because every situation is legal.
You’ll firstly need to own the property in a trust structure and you will be a beneficiary
of that trust, this means that money comes in as a beneficiary you can pay yourself,
the trust would then lease the property to a company, not yourself to a company and will
create a lease with that company and you would be the director of that company.
Really is the trust leasing to a company not you leasing to yourself and this is why in
some situations this can work, again as I say some situations, obviously this is a very
complicated area of tax law and you shouldn’t just go out and do this yourself you should
seek financial advice, lastly I just want to ask the question why would you even want
to do this, on the surface it sounds great, if we can rent out our property then we could
claim all of these expenses and then we get a tax refund we are paying less tax.
Awesome that sounds great doesn’t it, when you actually do the figures and when you actually
work it out it doesn’t always work out like this in fact in most cases you are actually
going to be worse of renting it to yourself than you are claiming it as your personal
place of residence and leaving in it yourself just paying the mortgage and considering it
a personal expense, even when you do it as a principle place of residence at least you
get that capital gain tax exemption. Let’s have a look at it, when we are renting
the property to ourselves we are paying rent, rent is not a tax deductible expense, okay,
now I’m receiving rent which is considered income and I now need to pay tax on that income.
Even if I claim my expenses and so forth like that then I’m still paying tax on that income,
I’ve paid tax to get it and then sending it to myself and I’m going to have to pay tax
on it again. I can understand on a personal situation where
the expenses of the property and the depreciation are going to be greater than the income, you
then got a loss which you can claim back against your tax, seeing that’s not possible when
the property is owned by a trust and the company is leasing the property, you can get the negative
gearing benefits that you get when you own a property yourself, because a trust really
can’t negatively give you like a person camp. Even if you own it in a trust and you’ve got
a company that is paying that trust well and your expenses are greater than your income
you want to get a tax refund it’s a trust that owns the property, you are a beneficiary
you don’t own the property the trust owns the property, the negative gearing benefits
that comes in owning the property in your own name don’t exist under a trust and therefore
the whole tax advantage of renting a property to yourself falls by the way side.
There are some rare circumstances where it’s going to be beneficial for you to rent the
property to yourself but this are very rare circumstances and if you are thinking about
this then you know it’s going to be good for you then you probably have a very good tax
accountant who understands the tax source and can help you out with that, again I don’t
suggest that you try and do this yourself go and see a professional and get them to
advice you because tax laws are always changing and this is something that is somewhat of
a great area to start with and it could change into the future.
I’m Ryan Mclean from positivecashflowaustralia.com.au, and we’ve got more videos, more audios and
more articles just like this one over at the website. If you want to find and invest in
positive cash flow properties then come and check us out.