What happens when I rent my home to family members?
What are your tax obligations and entitlements when renting to family members and friends?
Sometimes when a property owner travels overseas, is on the move for a temporary period, or just wants to help someone to get on their feet, they rent their property out at ‘mate’s rates’.
This is commonly to a relative or friend of the property owner. Often this rent is for less than its true rental market value.
If the owner makes a net ‘profit’ from the property at the end of the year, the profit is taxable as part of the owner’s income. In this event there will be some tax to pay to IRD the following year.
However, if the owner makes a net ‘loss’ in this situation (because the expenses of the property are more than the reduced rental income) the owner won’t generally be able to offset the loss against their other income for tax purposes. So let’s say you are charging 80% of the market rent then you would only be entitled to claim 80% of the expenses.
The best approach when renting to family members is for the owner to obtain a ‘market rent appraisal’. The appraisal must relate to the period of time that you are renting, not before and not after. This can easily be done with a call to a real estate agent who’s experienced in this field. These appraisals are generally free. The weekly market value obtained from the appraisal is then used to calculate a new rental income total. This means that all expenses that meet the tax deductible criteria can be offset against the rental income. In some cases this may result in a tax refund or in others a small tax to pay on the income.
So if you’re heading off on your OE and renting out your home to friends or family remember to obtain a market rent appraisal so that you’re claiming your full entitlements and the tax man is well pleased.
Are you renting the property at fair market value?
If so, then there is no issue with renting the property to a family member.
If not, and you are charging below fair market rent, then there is an issue. Say you are charging 75% of the market rent, then you would only be entitled to claim 75% of the expenses.
When considering fair market value, sometimes your rent might be slightly less because your relative is doing extra things like gardening, or your rent might be slightly lower as you are not requiring a property manager.
If the property is rented out at less than market value
Sometimes a person who owns a rental property will rent it out for less than its true
rental value. This most commonly happens when a relative or friend of the property
owner rents the property at “mate’s rates”.
If the owner makes a profit from the property, the profit is taxable as part of the
owner’s income. However, if the owner makes a loss in this situation (because the
expenses of the property are more than the reduced rental income), the owner won’t
generally be able to offset the loss against their other income for tax purposes.”