Renting to friends and family can seem like an appealing option due to the familiarity and trust involved, but it also comes with its own set of considerations and potential challenges. When considering renting a property to friends and family, there are several important aspects that investors should be mindful of.
BMT outlines what investors should know and examine a scenario that delves into the tax implications of renting an investment property to a family member.
Tip 1. Get a rental agreement and remain professional
When renting to friends and family, it’s important to politely maintain objectivity and professionalism throughout the process. This mindset will help you set clear expectations, establish boundaries, and handle any issues that may arise fairly and impartially. Separating personal relationships from the business aspect will contribute to a healthier and more successful rental experience.
Tip 2. Seek professional advice and management
It may be tempting to manage the property and tenant yourself instead of seeking professional advice and help. Not only does this make it difficult and uncomfortable to raise the rent and organise inspections and repairs, but it has the potential to create a disgruntled personal and professional relationship.
While it’s tempting, it’s best to seek professional advice and the help of a property professional, even more so when renting to friends and family. Property professionals hold the capacity to remain impartial while upholding the rental agreement for both parties.
Investors should seek advice and help from property professionals including property managers, accountants and financial advisors to ensure the best investment outcome.
Tip 3. Understand how rent can impact depreciation eligibility and other tax deductions
It’s common for investors to want to charge their friends and family a discounted rate, but this can be financially damaging once tax time comes around.
Investment properties generate thousands of dollars in deductions for their owners such as depreciation, interest fees, council rates, insurance fees, legal fees and more.
For full tax deductions to be available, properties need to be rented at market value. This means the rent charged for a property must match similar properties in the area for the owner to be eligible to claim full tax deductions.
When renting to friends and family, property owners need to be aware of how their depreciation eligibility can be impacted. By significantly reducing or completely waiving the rent for your friend or family member, you restrict the deductions you can claim.
Tip 4. Take advantage of partial year deductions
Investors can claim deductions on a pro-rata basis for the period the property was genuinely available for rent or earning a market value rent. Partial year deductions allow investors who use their property for both private and investment purposes, this is especially useful for holiday houses and properties used to house friends and family.
It’s common for individuals to provide housing for their elderly parents. One aspect to consider is the potential impact on an investor’s eligibility for depreciation and other tax deductions when renting to friends and family.
Case study: Mia rents property to her mother, Joan
Mia has purchased an investment property with the initial intention of accommodating her elderly mother, Joan, for six months until an aged care villa becomes accessible. Subsequently, Mia plans to rent out the property to a tenant.
The property’s market value of rent is around $550 per week. During her occupancy, Joan pays rent of $300 rent. Once Joan transitions to the villa, Mia finds another tenant who pays the $550 full market value of rent.
In this scenario, Mia’s eligibility to claim deductions is based on the proportion of rent paid by Joan in relation to the market value of rent. Since Joan paid 55 per cent of the market value, Mia can only claim 55 per cent of the deductions for the period when Joan occupied the property. However, when the second tenant, who paid the market value occupied the property, Mia was eligible to claim full deductions for that portion of the year.
So, to summarise, during periods when an investment property is genuinely available for rent or rented out at market value, investors can claim full deductions. When an investment property is rented below market value, the deductions are limited. For periods when a property is privately occupied, either by the owner or without any charge, tax deductions are not available.
Tip 5. Maximise claims with a depreciation schedule
Regardless of whether an investment property is rented to friends and family, investors can maximise their deductions with a tax depreciation schedule.
A tax depreciation schedule outlines the available tax deductions for depreciable assets within a property and how much an investor can claim per year.
BMT finds residential property investors an average deduction of almost $10,000 in the first full financial year.
A BMT Tax Depreciation schedule identifies all deductions available while maintaining full Australian Taxation Office rulings and regulations.
To learn more about the deductions available when renting to friends and family and how it can impact depreciation eligibility, call BMT on 1300 728 726 or Request a Quote.