Boarder tax solution?
Question from Zhivan updated on 13th July 2018:
My husband and I live on the North Shore. We live in a mortgage free, three bedroom family trust-owned property (of which we are both trustees). We both work full-time. My husband has just landed a one year contract in South Auckland.
We originally intended to simply rent out the family trust property for a year, and rent a house for a similar weekly rental in South Auckland. Unfortunately, this would lead to a tax loss as any beneficiary/trust income would be taxed.
One alternative we considered after reading the IRD site back to front was to rent a South Auckland house – but, rather than rent out the trust property, bring in two boarders. This would give 80% of the income of renting the whole house, be tax free if under $257/week per boarder, and reduce the hassle of moving. Would this be a legitimate approach?
Our expert Mark Withers responded:
No, I don't believe this would be a legitimate avoidance of the tax obligation on the rent. The notion of boarders and flatmates is that they live with you. The distinction between a boarder and a flatmate is that you feed a boarder at your cost but a flatmate shares both food and occupation costs .The tax treatment is actually different between boarders and flatmates and the distinction is often missed.
If you are living in the rented property in south Auckland the people paying to live in your North shore home are neither boarders nor flatmates. They are tenants and income from them would be taxable in my view.
You can claim deductions for the holding costs of the property while it is rented. But you are correct that you can not claim a deduction for your South Auckland rent cost. This is considered private and domestic even though it freed up the opportunity to rent your home. Hopefully, the after tax rent surplus on the North Shore is still more than the rent cost in South Auckland.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.