Tax impact when renting investment property to elderly parent.

Question

Hi,

I am looking at purchasing an investment property and my mother who currently lives with my sister has shown an interest in moving into it and paying a reduced rent. She doesn’t have much money overall, but is suggesting she put forward $80,000.00 towards the property.
My wife and I would take out a loan and purchase the property – afterwards my mother would offer the $80K. She would move in under Granny Flat Rights (as described by Centrelink) so her name would not be on the title.
What is the most effective approach/structure to purchase this in? I would only charge sufficient rent to cover interest. From my research, I expect I could only charge a reduced rent because i) I will not have a property manager involved and ii) I know I have a good tenant who will look after the property.
Should my mother ‘gift’ the $80,000.00 to me? Will there be tax impacts?

Answer

It seems to me you are trying to have it both ways. Centrelink won’t penalise your mother for gifting you the $80,000 under the Granny Flat provisions because it gives her a right to occupy the house. Yet when you go to complete your tax return you don’t want to include the $80,000 because it is a gift. If it truly was a gift then Centrelink would reduce your mother’s pension. It is a payment for a right to occupy the house and could be considered a rent payment if you try to claim a deduction for all the costs associated with the property. Normally the gift would not attract income tax because it is a private family arrangement of providing a granny flat because rent is not charged nor the property expenses claimed.
Further this is depriving your mother of rental assistance. If the only asset your mother has is $80,000 she could invest this and the income from the investment would not reduce her pension or rental assistance. If on the other hand you used it to reduce the mortgage then you are depriving yourself of a tax deduction though your interest saving maybe more than your mother will earn on her investment. Just depends on how much risk she is prepared to take. And you will probably find rent assistance will tip the scales in favour of leaving the money with your mother. Though I have heard of Centrelink offering rent assistance even when the Granny Flat concessions have been utilised. This is a Centrelink issue not tax law. So you will need to get more details from them.

I think when you do the numbers you will find you are be better off leaving the $80,000 with your mother and charging her market rent so that you can negatively gear the property. If you do not charge her market rent the ATO will only allow you deductions up to the amount of the rent you receive. It sounds like you have already read my and Noel Whittaker’s book and are aware of the things you can reduce the market rent by such as savings on agents fees, good tenant discount and in return for maintaining the property.

If the property is positively geared then maybe you should utilise the granny flat provisions so you can reduce the mortgage by the $80,000 but not charge her any rent so it does not result in taxable income to you. Again whether Centrelink will consider rent assistance and the Granny Flat concessions will affect whether this is the best choice.

In Summary:
A gift from your mother of $80,000 will not be taxable but if this is really rent in advance it will be. As your mother is entitled to earn some income before her pension is reduced it maybe better left in her hands than yours.

Lots of numbers to crunch but just remember none of this is worth considering if the property will be positively geared and Centrelink won’t pay rent assistance under the granny flat concessions.

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