# Property Question



## kirtdog (27 June 2014)

Sorry in advance as this is a stock market forum.

If peter borrows 500k for a house and rents it out to paul for $10 per week.

Paul does the same and rents it to Peter for $10 per week.

Hence both making huge losses on their property, and lowering their taxable income significantly.

Is this tax evasion? Can it be done legally?


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## Value Collector (27 June 2014)

kirtdog said:


> Sorry in advance as this is a stock market forum.
> 
> If peter borrows 500k for a house and rents it out to paul for $10 per week.
> 
> ...




If it can be shown that the only purposely for such a scheme was to avoid tax, then yes, it is tax evasion.

However the savings aren't always going to be as good as it would appear.

this system would allow you to claim back the interest against your current income, However it would be doing this at the expense of losing your Capital gains tax free status of a private home.

When you come to sell the home, you will have to pay capital gains tax on any gain, which might put you into a very high tax bracket.


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## Value Collector (27 June 2014)

Also, If you know that you are really only doing this scheme to rip the system off, would you really want to do it?


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## skc (27 June 2014)

Value Collector said:


> If it can be shown that the only purposely for such a scheme was to avoid tax, then yes, it is tax evasion.
> 
> However the savings aren't always going to be as good as it would appear.
> 
> ...




Yes... to do it properly, you should live in it for 12 months to make it PPOR, then do a dodgy reciprocal renting agreement for the next 7 years as an investment property, and revert back to PPOR after that. That way you get interest deduction for 7 years without losing the CGT-free status.

P.S. Most probably be considered tax evasion.


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## McLovin (27 June 2014)

Why not just leave it empty? There's nothing that says a house has to be occupied in order to claim negative gearing, is there?


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## Value Collector (27 June 2014)

McLovin said:


> Why not just leave it empty? There's nothing that says a house has to be occupied in order to claim negative gearing, is there?




I think it has to be generating some income


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## cynic (27 June 2014)

The last time I checked, the ATO had some general guidelines about negative gearing in circumstances where the landlord heavily discounts the rent. In effect the only negative gearing allowable in such circumstances was for the loss that would have accrued if the landlord had charged a realistic rental amount.


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## Vixs (27 June 2014)

Value Collector said:


> I think it has to be generating some income




+1, if it's not available for rent it's not an income producing asset. I'm not an accountant, but that's my understanding as well.


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## beachlife (27 June 2014)

A TV money guru was advocating this a few years ago (but with normal rent levels), I wonder what the ATO had to say.  If you discount rent to anyone, the ATO will deem that you have earnt market rent.  Very hard to beat them and not worth the consequences if you get caught.

So there is no benefit in doing it with a friend, but nothing wrong with renting your place out while you rent someone elses, except for the hassle of dealing with property managers.


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## Tano (27 June 2014)

kirtdog said:


> Sorry in advance as this is a stock market forum.
> 
> If peter borrows 500k for a house and rents it out to paul for $10 per week.
> 
> ...





No.  It would have to be at market rate otherwise the tax payers are unfairly subsidising your negative gearing.


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## Tano (27 June 2014)

Vixs said:


> +1, if it's not available for rent it's not an income producing asset. I'm not an accountant, but that's my understanding as well.



Income producing asset or intention to income produce (building a house or advertising for rent whilst then house is vacant still qualifies for tax deduction)


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## McLovin (27 June 2014)

Value Collector said:


> I think it has to be generating some income




OK that makes sense. In instances where the property is not rented at market rates, can't the ATO just adjust the deduction to take into account a "normal" market rate?


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## satanoperca (27 June 2014)

skc said:


> Yes... to do it properly, you should live in it for 12 months to make it PPOR, then do a dodgy reciprocal renting agreement for the next 7 years as an investment property, and revert back to PPOR after that. That way you get interest deduction for 7 years without losing the CGT-free status.
> 
> P.S. Most probably be considered tax evasion.




Please going and check with your accountant. Great idea, but tax evasion it is and thought up before.

You still have to pay capital gains on the gain for the 7 years it was an investment. 

Cheers


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## skc (27 June 2014)

satanoperca said:


> Please going and check with your accountant. Great idea, but tax evasion it is and thought up before.
> 
> You still have to pay capital gains on the gain for the 7 years it was an investment.
> 
> Cheers




Or may be you need to send this linke to your accountant... although I was wrong about the duration by 1 year.

https://www.ato.gov.au/Media-centre/Articles/Moving-on--Remember-the-six-year-rule-for-CGT/



> Renting out a house that was your main residence means you get rent, can claim deductions and, when it comes to sell, you often won't have to pay capital gains tax (CGT). But there are a few requirements to be met before you qualify.




In fact you can do as many 6-year periods as you wish.

I am not suggesting this is or isn't tax evasion... I am just saying there's a better way of doing it than what the OP's suggested. Anyone thinking of doing it best consult their own advisors / ATO.


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## Wysiwyg (27 June 2014)

skc said:


> I am not suggesting this is or isn't tax evasion... I am just saying there's a better way of doing it than what the OP's suggested. Anyone thinking of doing it best consult their own advisors / ATO.



Lordy lordy. If I have 30k of landscaping/repairs to be done on my main property I could move out, rent the place and then do the 30k worth of landscaping/repairs over the course of a year. All claimable as a deduction if property includes the land it's on. Rental lease ends after 1 year, move back in and all is well.


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## Value Collector (28 June 2014)

Wysiwyg said:


> Lordy lordy. If I have 30k of landscaping/repairs to be done on my main property I could move out, rent the place and then do the 30k worth of landscaping/repairs over the course of a year. All claimable as a deduction if property includes the land it's on. Rental lease ends after 1 year, move back in and all is well.




I think amounts above a certain figure have to be depreciated, i don't know how many people actually do it correctly, but a $15k new kitchen can not be claimed off a single years income, it is meant to be added to the depreciation schedule as a capital item.


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## Value Collector (28 June 2014)

kirtdog said:


> Is this tax evasion? Can it be done legally?




The other question you have to ask yourself is, does it pass the news paper test.

eg, Would you be happy for a story about your scheme to appear in local paper, written by a smart but kind of unfriendly journalist, would you be happy for your friends, family and colleagues to find out you are involved in a scheme to rip of your fellow tax payers.

Or imagine standing up in front of a judge and jury explaining the details, what would they think. 

If you wouldn't want it in the paper or you don't think you could explain to a smart judge any other reason for it except to avoid tax, Its probably not a good idea to do it.


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