Hi all, when renting to a relative (Mum), are there any rules we should stick to in order to pass the TAX Audit time? I have heard from many it is best not to rent to relative but I am confident my mum will look after it very well.
I am planning to take out landlord insurance as well as charging her the market rate minus 9%(because I am going to manage it myself). Do I need to written some kind of rental agreement with her if she becomes my tenants? Apart from the above, what else do I need to watch for when it comes to tax time? The property will be negatively geared.
Yours thoughts will be mostly appreciated.
Do you really need landlords insurance? Is your mum likely to trust the place or run off without paying the rent?
You don't really need a contract in written form, oral should be fine. But oral contracts on property are unenforceable. I don't think the ATO is concerned with this however, as long you can establish it is market rates.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I think it would be a good idea to speak to an insurer about this plan. If something happens with the house during the tenancy, it might only be claimable if landlord insurance is in place, and there might be a requirement for a contract.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Good point Jack. And some landlords insurance policies only apply if the property is rented through an agent.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks guys, called a few insurance company and it appears that only half of them requires a property manager, other half is happy for you to manage it.
Hold that thought, be careful what you read……
Landlord insurance is:
1. Rent default
2. Vandalism
3. Theft
4. Loss or damage to building and contents
5. Loss of tenant
6. Liability cover (covered under building insurance).As you can see, there is no need to cover your Mother. I am sure the insurers told you this as their duty of care would not allow them to deceive….
Just to cover yourself, get a rental appraisal from a local property manager and get it in writing. That way you can always prove to the tax office that you were charging market rate. The tax office doesn't like transactions that aren't "arms length".
Cheers
K
Excellent point guys. I guess what I am worried about is without landlord insurance, the Tax man will argue that you have the intension avoiding tax by not having the landlord insurnace.
In regards to point number 4 and 6:
4. Loss or damage to building and contents (What does loss or damage to building and contents covering exactly? Things like fire?)
6. Liability cover (covered under building insurance). (is that public liability?)I will ring the insurance again to find out abit more as well.
I doubt the ATO could argue that failure to have the landlord's insurance suggests anything untoward by you. Do a search on this forum on property rental disasters and you will soon see just how many people don't have landlord's insurance!
Cheers
K
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