This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
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A co-owner of an investment property is regarded as an investor who is not carrying on a rental property business, either alone or in conjunction with the other co-owners. This is because of the limited scope of the rental property activities, and the limited degree to which a co-owner actively participates in rental property activities.
Joint tenants must divide the income and expenses for the property in line with their legal interest in the property. With joint tenancy, each joint tenant holds an equal interest in the property. A partnership agreement, either oral or in writing, cannot change this. Interest on money borrowed by only one of the joint tenants which is exclusively used to acquire that person's interest in the rental property does not need to be divided between joint tenants.
Mr and Mrs Hitchman are joint tenants in an investment rental property. Their activity is insufficient for them to be characterised as carrying on a rental property business. In the relevant year, Mrs Hitchman telephones the ATO and asks if she can claim 80 per cent of the rental loss. Mrs Hitchman says she is earning $67 000 a year, and Mr Hitchman is earning $31 000. Therefore, it would be better if she claimed most of the rental loss, as she would save more tax. Mrs Hitchman thought it was fair that she claimed a bigger loss because most of the expenses were paid out of her wages. Under a partnership agreement drawn up by the Hitchmans, Mrs Hitchman is supposed to claim 80 per cent of any rental loss.
Mrs Hitchman was told that where 2 people are joint tenants in a rental property, the net rental loss must be shared in line with their legal interest in the property. Therefore, the Hitchmans must each include half of the total income and expenses in their tax returns.
Any agreement that the Hitchmans might draw up to divide the income and expenses in proportions other than equal shares has no effect for income tax purposes. Therefore, even if Mrs Hitchman paid most of the bills associated with the rental property, she would not be able to claim more of the rental property deductions than Mr Hitchman.
Tenants in common must also divide the income and expenses of the property in line with their legal interest in the property. However, with a tenancy in common, the tenants in common may hold different proportionate interests in the property. A partnership agreement, either oral or in writing, cannot change this.
Tenants in common
In the example above, if the Hitchmans held their property interest as tenants in common in equal shares, Mrs Hitchman would still be able to claim only 50 per cent of the total property deductions.
However, if Mrs Hitchman's legal interest was 75 per cent and Mr Hitchman's legal interest was 25 per cent, Mrs Hitchman would be required to include 75 per cent of the income and expenses on her tax return and Mr Hitchman would be required to include 25 per cent of the income and expenses on his tax return.
If you don't know whether you hold your legal interest as a joint tenant or a tenant in common, read the title deed for the rental property.
Multiple property owners who are not partners at general law
The Tobins own, as joint tenants, 2 units and a house from which they derive rental income. The Tobins occasionally inspect the properties and also interview prospective tenants. Mr Tobin performs most repairs and maintenance on the properties himself, although he generally relies on the tenants to let him know what is required. The Tobins do any cleaning or maintenance that is required when tenants move out. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. Although the Tobins devote some of their time to rental income activities, their main sources of income are their respective full-time jobs.
The Tobins are not partners at general law-they are only co-owners of several rental properties. Therefore, they must each include half of the total income and expenses on their tax returns-that is, in line with their legal interest in the properties.
For more information, read the following section, Partners at general law.
Last modified: 18 Jul 2008QC 16578