Investment property: Renting out at non commercial rates

The following is a highly questioned area so I thought I would use the ATO’s own example to confirm the ATO’s position on leasing out your investment property at non commercial rates.

Scenario: Market rent for your investment property is $500 per week but you are a great friend or family member and renting out your property at $300 per week instead. Although it is very nice and welcome by the recipient – this does have tax consequences. Read on.

(Example copied from ATO’s Rental properties 2011 guide for rental property owners)

” Mr and Mrs Hitchman were charging their previous Queensland tenants the normal commercial rate of rent ($180 per week). They allowed their son, Tim, to live in the property at a nominal rent of $40 per week. Tim lived in the property for four weeks. When he moved out, the Hitchmans advertised for tenants. Although Tim was paying rent to the Hitchmans, the arrangement was not based on normal commercial rates. As a result, the Hitchmans cannot claim a deduction for the total rental property expenses for the period Tim was living in the property. Generally, a deduction can be claimed for rental property expenses up to the amount of rental income received from this type of non-commercial arrangement.

Assuming that during the four weeks of Tim’s residence the Hitchmans incurred rental expenses of more than $160, these deductions would be limited to $160 in total ($40 multiplied by 4 weeks).

If Tim had been living in the house rent free, the Hitchmans would not have been able to claim any deductions for the time he was living in the property. ” For any further information, please contact this office.