So you’ve purchased an investment property and you’ve decided that you now want to move into that investment property. Can you rent your own investment property and claim the tax deductions as a standard investment property?
The short answer is no. Owning a property in your own name and then renting it to yourself is not going to go down well with the Australian Taxation Office (ATO).
The longer answer is maybe because of something called “at arm’s length”. We will discuss this later. But first let’s look in more detail about owning the property in your own name and renting it to yourself.
Owning the property in your own name
The ATO will look at the purposes of transactions and will consider you owning and living in a property to be a personal expense (this is an important concept to understand).
It’s not considered to be a business expense or an income-producing expense. These are what make things tax-deductible.
However purchasing an investment property and renting it out to someone else will generate real income and thus will be tax-deductible. Just like a business would need to pay their business expenses in order to make a profit (and claim those expenses) you would then be able to claim a variety of tax-deductions.
Renting a property from yourself and to yourself is going to be a personal expense no matter which way you try and spin it. The ATO is going to see that as a personal expense and you’re highly likely to get audited.
I do suggest that you go and see a professional tax accountant about this, and they can discuss it with you in more detail.
At arm’s length
“At arm’s length” is a clause that people have used to rent properties to themselves in a roundabout way. I highly recommend that you speak to a tax accountant before doing this. Please note that the following information is for general educational purposes only.
The term “at arm’s length” is not clearly defined. It essentially means that if the person renting the property and the person they’re renting it to are at arm’s lengths to each other.
I say “some” situations and I say “can” be legal because every situation is different.
Trust structures and beneficiaries
You would firstly need to own the property in a trust structure. You would be a beneficiary of that trust. This means that if money comes in then you — as a beneficiary — could pay yourself. The trust would then lease the property to a company. You may choose to be the director of that company.
Ultimately the trust would be leasing to a company as opposed to you leasing to yourself. This is why, in some situations, this can work. But again I say “some” situations. Obviously this is a very complicated area of tax law. Please seek financial advice.
Why would you want to rent your own investment property?
On the surface it sounds great. We can rent out our property and claim all of these expenses to get a tax refund. That sounds great, doesn’t it?
But when you do the figures it doesn’t always work out like this. Renting the property to yourself may actually place you in a worse situation than if you claimed it as your personal place of residence and simply paid the mortgage and associated expenses.
Negative gearing benefits
Consider this situation.
When I’m renting the property to myself I am paying rent. Rent is not a tax-deductible expense. But now I am receiving rent — which is considered income — and I now need to pay tax on that income. I’m still paying tax on that income even if I claim my expenses.
So I’ve paid tax to get it. I’m then sending it to myself and I’m going to have to pay tax on it again.
This would only work if the expense and depreciation of the property were greater than the income. I would then have a loss that I could claim back against my tax. But this is not possible when the property is owned by a trust and the company is leasing the property.
You can’t get the negative gearing benefits that you get when you own a property yourself when you own a property in a trust structure.
This is true even if you own it in a trust and you’ve got a company that is paying that trust. Your expenses are greater than your income and you want to get a tax refund.
But it’s a trust that owns the property. You’re a beneficiary. You don’t own the property. The trust owns it.
The negative gearing benefits that come with owning a property in your own name don’t exist under a trust. Therefore the whole tax advantage of renting a property to yourself falls by the wayside.
There are some rare circumstances where it is going to be beneficial for you to rent the property to yourself. But these are very rare circumstances.
I do not suggest that you try and do any of this yourself. Tax laws are always changing. Speak with a professional who understands the tax laws and get them to advise you. Renting your own investment property is somewhat of a grey area and it could change into the future.