Can I claim a rental loss from my Trust when I am residing in it?

Question from Ron updated on 5th February 2010:

I have a family trust with a property that has been rented until now. I am now needing to move into the property myself. I understand that you can't rent a property owned by your own trust and claim tax. The family trust has a mortgage and has insufficient income to pay it without rent. What is the best way to do this?

Our expert Mark Withers responded:

Yes Ron, claiming a rental loss in the trust when you are residing in the property yourself is a non starter. IRD have clamped down on this type of thing with LAQC arrangements and the principles are no different with a trust.

If you are providing the funds to enable the trust to meet its mortgage committments this money is simple a further advance by you to your trust. The removal of the rental property from the tax base also triggers a "deemed disposal" of the property for depreciation purposes.

So if the value of the depreciated asset exceeds book value a recovery of depreciation must be added back into the trusts tax return on the first day of the next income tax year. This recovery is always a bit of a sting in the tail when you haven't actually unlocked any cash from the sale of the property. Hopefully you have some accumulated tax losses in the trust that can offset the recovery. Regards Mark Withers

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.



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