Mortgage idea

Lraj1984 on 06/08/2014 - 09:51
Last edited 06/08/2014 - 09:52

Hi All,

Me and my friend are looking to buy a residential property around $350-400K each.
It will be our first home.
Very likely we will either buy a land and built two similar units/townhouse or may be just buy two newly built units/townhouse next to each other.
We are planning to live in our own property for first twelve months in order to be eligible for FHOG and stamp duty reduction.
If we live in our own property and make mortgage payments then we cant claim that as deduction in our tax return, but if we swap the property i.e. to move in each other's property and claim our own property as investment property so that we can claim deduction on the mortgage interest payments, depreciation and other miscellaneous expenses in tax returns to reduce our assessable income.
Also we will be paying the rent to each other for living in each other's property. So that rent income will be addedd in our individual income tax return as our income.
I havent done EXACT numbers but just say for example If I pay $1400 interest (interest only loan) a month plus other exp (including depreciation) are $600 = so roughly $2000 we can claim as deduction per month.
The rent we get as an income would be APPROX $800 a month.
Hypothetically $1200 (Difference between 2000 and 800) * 12 months = $14400 can be claimed as deduction.
AGAIN NUMBERS ARE JUST HYPOTHETICAL I WILL GET ADVICE ON IT.
What I want to know now is "Is this legal to do"?

Thanks in advance for all your responses.

Financial

Comments

  • ProjectZero on 06/08/2014 - 10:02
    +2

    From my understanding, you can't get the FHOG and still claim the interest as costs.

    At least not for the first 6 months, basically you have to "live there" and so you can't rent it out. Of course you can do it and hide it but that would be illegal and also not applicable for tax return purposes.

  • frysie on 06/08/2014 - 10:02

    If you "swap properties"

    don't forget stamp duty (based on "market rate" not mates rates). Change of deed on house (mortgages will need to be changed) etc. nice idea but you got work out the other costs… you can claim $2000 of deductions but you will only get a bit of that back come tax time (depending on your income)

    • ProjectZero on 06/08/2014 - 10:09
      +2

      I think the OP means that they will "rent" it out to each other when he said "swap properties"

  • ozhunter on 06/08/2014 - 10:11

    What I want to know now is "Is this legal to do"?

    It seems to me like you know it isn't. Like Projectzero said, you can't claim fhog and then consider it as an investment property for the first 6 months.

    • ProjectZero on 06/08/2014 - 10:14

      I think what he is suggesting is more of a grey area because i don't think there is anything that states you can't rent it out after the first six months.

      Please correct me if I'm wrong as i am not a solicitor.

    • ESEMCE on 06/08/2014 - 10:17

      It's legal to do after you have met the FHOG obligations..
      If you're going to do it, work out the maths to see if the FHOG is worth it, you may find you can "save" more by implementing your plan from day 1.

      I've thought of this loophole before too. You need to be on very strong terms with your friend, and you need to be 100% certain that one house wont get a dodgy neighbor (or similar) that results in the arrangement being annulled.
      You need to have a lot of trust that they'll do the right thing by your house (and vice versa). But I can't see how it can be deemed illegal (note IANAL).

  • Smulder on 06/08/2014 - 10:23
    +6

    You should have a read of the anti-avoidance provisions of the tax legislation. If the ATO believes your scheme was done purely to gain a tax advantage you may be penalised.

    • cloudy on 06/08/2014 - 11:51

      both parties could argue they like living in each others places instead? haha

      kidding.

      I agree with you smulder, check out the Part IVA provisions first

  • mick123 on 06/08/2014 - 10:24
    +1

    I know friends who have talked about trying this and I have friends who are experienced tax accountants etc, but yes, it is illegal.
    The ATO uses a common sense test.
    The houses will be next to each other and as you say, similar to each other. That is where you will have a problem.
    You may get away with it for a few years if lucky, but it could catch up to you

    • ESEMCE on 06/08/2014 - 10:29

      So make sure one is a 2 bedroom, and the other a 3 bedroom..
      and that they're not immediately next door.
      Do it across 3 friends, so that you're not renting your place to the owner of your place of residence.
      Plenty of ways to wrangle it. Of course it gets more and more complicated.

      There's more risk that you'll have a falling out with the mate in my opinion.
      Break a window, refuse to pay.. Hot water service goes bang and they don't have money to replace it for a month… all sorts of situations that can arise and spoil a friendship.

  • raj1984 on 06/08/2014 - 11:11

    Thank you for your responses guys.

    I should have searched it before as there is another similar link.

    https://www.ozbargain.com.au/node/148378

  • mskeggs on 07/08/2014 - 08:14

    Be aware you will lose CGT concessions on your primary residence if you make it an investment (you have 6 years after you move out to sell).

    • Cheshire Cat on 07/08/2014 - 09:23

      Or you can move back in to reset it ever 5.5 years.

  • srhardy on 07/08/2014 - 09:36

    the other, much talked about scam is using super to rent to family, or to swap super homes with someone and live in a rented super paid for home, and your rent is used to actually pay for your home (next door even), and vice versa…

    its all good until something goes wrong, and it always does, its murfy's law.

    one place burns down, the neighbour moves and rents your dream home to scum of the earth, someone tells the ATO and your fund is in breach… the list goes on and on, all you need a a fight with your wife, or your cohorts neighbour does and your screwed

    the rule is 'two men can keep a secret if one of them is dead' is SO TRUE

  • WT on 07/08/2014 - 10:18
    -1

    why not go one step further, build the house, start claiming, add windows, doors, kitchen, bathroom, floors, lights, garden etc and claim all of it is "upkeep" on tax

    • backpaqer on 07/08/2014 - 13:19

      Maintenance vs Capital Improvements is well covered already.

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