An old house was purchased between brother and my husband and I as tenants in common with 50/40/10% share respectively on 6 July 2013 (settlement date). We intend to knock down the existing house and build a duplex and split the title. My brother will live in one duplex and will retain 100% ownership of one title. My husband and I intend to rent our duplex out and we will retain 100% ownership (90% owned by husband, 10% owned by me) of the other title. A partition agreement was drawn up by the conveyancing agent at the time of settlement.
However we wanted to rent out the existing house until such time the construction of the duplex was ready to start.
Prior to settlement, we agreed to rent the existing house to the previous owners for approximately 1 week to allow them time to get their affairs into order. We did not use an agent to set up the rental agreement but agreed in writing with the previous owner.
We split the rent of $250 up according to our ownership (50/40/10). The rental period ended 12 July 2013 and the tenants (previous owners) vacated on that date.
At the final inspection (prior to settlement), we had a real estate agent go through the house with us to determine what would need to be done to get the house into a rentable condition and determine the level of rent we could collect. However, upon reviewing the house, we all decided that the house was “unfit” to continue being renting out as it required significant maintenance (missing windows, exposed wiring etc) and could possibly cause a liability issue for us.
We decided to demolish the house as soon as possible – which would also avoid the potential issue of squatters and liability. We obtained a quantity surveyors report prior to demolition. The house remained empty until it was demolished on 16 October 2013. The block remains vacant as of today. The construction of the duplex is not due to begin until mid October 2014, with completion expected in June/July 2015.
My brother has got a home loan for his half of the property purchase as well as for his half of the duplex construction. The loan is in his name; however, my husband and I are guarantors. Once the duplex is constructed and the property subdivided, we will no longer be guarantors on his loan.
Our half of the property purchase and construction was funded by a separate investment loan in both our names. No parties are registered for GST. My brother works in IT, I’m an engineer and my husband is an insurance manager – where we all employees and have PAYG.
The following questions relate to my and my husband’s share of the existing property only – i.e. the 40/10% share. Since my brother intends to live in his new property, he does not intend to claim any costs associated with the existing property in his tax return.
1. Can we claim any deductions for depreciation / scrapping of the property in the 2013/2014 tax year since it was only rented for one week?
2. If not, can we claim any deductions for depreciation / scrapping in future tax years once the new duplex construction is completed and rented out?
3. I believe we can claim 100% of the loan interest now (since our investment loan was set up specifically with the intention for a rental property); however, can we claim any other holding costs (e.g rates) for the 2013/14 tax year (eg. 1 week apportionment)?
4. If not, are these holding costs added to the capital cost base up until the time the new duplex is rented out?
5. Would we be liable for GST if my brother decided to sell his side of the duplex later in life, even though the title of his side of the property is now only in his name?
Yes it sounds like you have good reason for the delays and that they were really just part and parcel of the construction process so interest will be deductible all the way through.