Can I Rent my Rental Property to my Mother?

Can I Rent my Rental Property to my Mother? (Or Brother / Sister / Daughter)

Now its fairly obvious that you can! (Self Managed Super have special rules about this though — this article is not meant for SMSF))    Now if you rent your investment property to a family member at normal commercial rent then the property functions just as normal; the rent received is income and all the expenses related to the property are tax deductible.

Now if this is not the case then its likely you have one of two probems.

Problem 1

Some clients have told me “I rent my property to my Daughter so I don’t have to include that income because its just between family” So this first issue is if you do rent your rental property to a family member is the income you receive assessable income (and so do you need to put it on your tax return) or is it private in nature? Rental income is generally ordinary assessable income. (and so should be included on your tax return)

The Tax Office has clarified this in their ruling IT 2167 “Ordinarily, where a taxpayer grants a lease or licence of property, whether wholly or in part, whether at arms length or otherwise, the amount received as rent or in respect of the licence is assessable income even if the rental is paid by a family member or relative”

This was also an issue that was raised in a famous case about rental properties and relatives; FCT v Kowal, in this case Kowal was paid below market rent by his Mother and Kowal claimed tax deductions for the full amount of rental property expenses. This may also be your situation – you want to claim the costs of owning your property like councile rates, mortgage interest and insurance, which takes us to:

Problem 2

If you rent your property to your Mum (or someone related to you) and to be nice you charge cheap (or even free) rent can you still claim tax deductions for the costs of owning that property.

It is suggested by the Tax Office in their tax ruling IT 2167 paragraph 24 that in a situation like this you should limit your total Deductions for holding the property to the amount of Assessable income earned, in otherwords no negative gearing. The ATO wants you to claim only expenses up to the amount of rent received.

The ATO states in their ruling that this is based on Kowal’s case but actually in Kowal’s case the deductions were not limited to the amount of assessable income. Rather the judge looked at a situation where Kowal was renting a property out to his mother at below market rent. Based on this it was decided the property expenses were connected to Kowal’s assessable income but that they also have a private portion in that Kowal wanted to have an investment and earn assessable income (Assessable) but he also wanted to provide a home for his mother to live in (Private in nature).

With that said my advice would be to follow the ATO ruling and if you are renting to freinds or family and your rent is not market price limit your tax deductions to the amount of income. If you you are renting to family at market rent then please get a written rent appraisal and keep this one file.

If problem 1 or problem 2 is something that you have happening in your life please take it seriously and get profesional advice, the ATO has a storng focus on these type of issues with rental properties and its really not worth the fines and interest! Please get in touch with our Rental Property Accountants Here