Renting out rooms in property owned by Family Trust

[quebec]

My first post, just joined today. Yay!!
Hi all, I have a property with 4 bedrooms and I occupy one of them. I rent out two rooms. Property is in the name of family trust and I am the sole trustee (I Know!, a lawyer advised me recently that I should be reviewing this) I would like to keep everything straight so I am filing tax return for year ending Mar 2013 at that time property wasn't in the name of trust. I am showing the income from flatmates etc. My accountant says that for year ending 2014 trust will have to file the return and I would not get any benefits. I have few questions-
1. Year Ending 2013 when property was just in my personal name, can I claim some benefits like how you would for a rental property as I only occupy 1 room but pay Mortgage for the whole house, rates, insurance etc.
2. For year ending 2014, is there a work around or how should I go about it in future?
Any other advise is welcome as I am new to all this.
Thanks

[Anthonyacat]

Hi Quebec

Unclear exactly what you refer to as "benefits", but overall there are a lot of considerations to be had here.

Firstly, while the property is in your name. You must declare all income in your personal return. You have the ability to claim a portion of your house running expenses, and you pay tax (or get a refund - is this the 'benefit' you refer to?) on the remainder. How you calculate that proportion should be whatever you are comfortable justifying to the IRD should you be audited. Some accountants would claim 2/3 of all expenses, as you are only 1/3 of the users of the house. Some would argue you can only claim based on area rented out (100% of bedrooms and other exclusive areas, 0-66% of joint areas), while others again would claim everything except your private bedroom, as the others have access to that space and your rent would be lower without them.

While it is in the Trust, to the letter of the law, you should be declaring this in the trust tax return. If there is a profit (rent exceeds expenses claimed) you can allocate that income to yourself, to pay tax at a potentially lower rate, but if it is a loss, it is stuck in the trust to offset future profits.

I say to the letter of the law, as within some circles of accountants and lawyers there is the belief that the trust can "resolve" that the house be used by a beneficiary however they see fit, and as such can continue declaring rent and expenses in their own name. I've seen it done, but I've never seen it tested. Don't know how well it would hold up.

Then there is the transitional year, in which you owned the property for part and the trust owned for part. Unless you sold it on balance date (1 April for most individuals and trusts) this will mean both the above methods will need to be used in the transitional year.

As a side note to all of this, the IRD allows an exclusion for "Boarders" (but not for "flatmates" or "tenants", and they offer no distinction on what the difference is) where if they pay you less than about $250 per week you don't need to declare anything for tax. This is of significant benefit to those with no mortgage, as costs will be no where near income. Whether you can take advantage of this exclusion when a trust owns the house is debatable, but I certainly believe so.

[quebec]

Thanks Anthonyacat. Yes that is exactly what I was referring to as benefit. I read somewhere that you have to provide food etc for the occupants to be deemed as Boarders, if not they are tenants or flatmates. Rent has always been going into my personal separate account as I wanted to keep things neat. Could that be an issue since property has been owned by Trust since mid 2013?
I just don't want any unnecessary trouble and would like to do things right and favourable to me is possible, if I don't end up gaining anything with it being in the name of Trust now then I might decide to sell or rent it out completely. Thanks

[Anthonyacat]

There is such a concept as "board without food", so I would assume one can be a boarder without having food supplied. Again, I've never seen anything from the IRD about the distinction, and I've seen it treated both ways.

While it is better for the rent to go into a Trust account (and the expenses to be paid from there, too) this is simply for record keeping purposes, and reducing the work for your accountant at year end. If you have a good record of the income and expenses, these can be accounted for without the trust ever owning a bank account. Effectively the trust is lending you that money. Most trust deeds allow for interest free loans to beneficiaries, so there's no problem there.

It sounds like you are a fairly conservative person from a tax perspective. But remember that getting legitimate tax deductions is never a bad thing. It is just how far you choose to push it. Definitely talk to your accountant, if they don't seem to know what they are talking about, I can recommend a couple who would (including of course the firm I work for).

Watch out if selling the property too soon after buying it. IRD are on a bit of a mission right now catching people who "buy with the intention to sell". Not saying this is you, but make sure to keep good documentation. The onus is on the taxpayer.

[quebec]

There is definitely going to be loss for year ending 2014 as the rent from 2 rooms is nowhere near enough to cover the Interest on the Mortgage and then there are expenses, so nothing I can do to get a refund or file that loss against tax paid on my personal income? Loss will be sitting against the Trust I assume and then what happens? My accountant is very helpful and works from home so very convenient too, not sure if he knows what he is talking about as I haven't dealt with anyone else ever. By the way, what would be an accountants fee to file tax return for my scenario where there is straightforward rent coming in and expenses are interest, rates, insurance, bit of maintenance and regular utility bills etc. Thanks

[Anthonyacat]

Whether rent covers expenses will depend what proportion of expenses you claim, but assuming you are correct that there is a loss, you have the potentially erroneous option I mentioned above where the trust resolves to let you use the property for whatever means you wish.

If you have other income such as interest, dividends, or rent from another source you could try to divert this through the trust to make use of the losses. But by the sounds of your scenario you don't.

The loss will sit inside the trust to offset future income one day, if that ever happens. This will happen when your rental is making a profit, you effectively don't have to pay tax until all the tax losses are used up.

I am afraid I am not involved in the invoicing side of our business, so I really don't know what it would cost. If you live in South Auckland and were interested, the first meeting with my firm is free, after which point you are usually given an upfront pricing quote. I can also recommend (based on quality) firms in Central Auckland and Hamilton, but don't know their practises around pricing.

But I can tell you that it probably isn't as simple as just filing a return, trusts usually require financial statements to be prepared. There is likely also a fair bit of other planning that can be done that might benefit you. Or maybe not. You don't know until you ask.

[quebec]

Thanks Anthonyacat. I'll get back to you if I need a new accountant, probably closer to the time of filing returns for year ending 2014. Thanks

[Rosco]

Hi Quebec,

I'm going to focus on your Trust.

Why have you set up a Trust, ie what benefit do you see?

Currently Trusts are getting challenged more and more. Your Trust looks like a sham from a quick glance!
- just you making the decisions
- no financial statements
- Trust income going to you
- No Trust bank account?
- I'm guessing no Trust minutes for decisions made ?

Why all of these things don't necessarily mean the Trust could be overturned or challenged, they start to point towards a sham Trust. This could give you issues later.

Presuming you have spent thousands setting up a Trust, you want it to work for you in the way it originally intended. Therefore I would try to correct each of these issues quickly.

For full financial statements for a Trust, you are looking at around $1,000 + GST for simple accounts, including a Trust minute.

We charge $75 to be a Trustee, plus require at least an annual Trust meeting which costs $75 (done by phone to reduce time).

To add a Trustee will incur legal costs of over $1,000, to change the loans and title.

Ross

[sidinz]

While it is better for the rent to go into a Trust account (and the expenses to be paid from there, too) this is simply for record keeping purposes, and reducing the work for your accountant at year end.

My Trust is set up so that I (as beneficiary) am responsible for paying all expenses related to the house. Therefore the Trust does not have a bank account.
Under these conditions, would you still give the above advice?

Surely most cases where the house is the only asset in a family Trust, it would be set up in a similar way? Otherwise where would the Trust get the money to pay the expenses?

When I went away for work and rented out my place, I decided that a) as my Trust didn't have a bank account and direct debits were already set up from my personal account, b) part of the rent included personally-owned chattels, c) the issues involved with part-year returns, d) there were no impediments to me renting the place out in the Trust deeds, e) I would still have been personally responsible for paying the expenses, and f) there were insurance issues to think about, it was simpler to rent it under my name and file the tax accordingly. It would seem to me that in a space-sharing scenario, these points would be even more pertinent.

[Anthonyacat]

To start with your first question, I would always recommend the money goes in and out of a trust bank account if this is possible, but again that is only for record keeping purposes, nothing further. If it takes more work to open and maintain the account, changing DDs, etc, than it would to trawl through bank statements for expenses, then that's your own business.

in most family trust situations where it only owns the house, technically the owners are advancing the trust funds to pay to expenses. I don't really know the specifics, as accountants don't much deal with them as there's no tax or financial statements involved.

Now, the long multifaceted paragraph;

A) Trust didn't have a bank account and direct debits were already set up
No tax or Trust Law issue here. Just record keeping.

B) Part of the rent included personally-owned chattels
Accounting for that would be a pain, and probably not be material, technically I guess the trust could rent them off you and recent to the tenants? Would be a hassle. But that in itself doesn't allow you to collect rent from a building you don't own.

C) Part-year returns
As I see it, there would be no part-year return? There would be rent for only part of the year, but this would be the same whether in the trust or your own return. Either way you would prepare a full year return.

D) No impediments to me renting the place out in the Trust deeds
Good. Wouldn't be a very good deed if it prevented the trustees from making income earning decisions.

E) I would still have been personally responsible for paying the expenses
While I haven't seen your deed, it is usually the trustees responsibility for paying expenses, not yours. While you may be one of (or maybe even the only?) trustee, you are acting in a separate role as trustee, and from a legal perspective are not the same person.

F) Insurance issues to think about
Very vague, I could write paragraphs on awful issues with insurance that can potentially arise if you are insuring something in your own name but it is owned by a trust. Bed careful!

[G?] It was simpler to rent it under my name and file the tax accordingly
Simpler doesn't equal correct. As perhaps an extreme example, it would be simpler not to file tax returns at all. Perhaps not that extreme an example. Plenty of people don't.

[H?] It would seem to me that in a space-sharing scenario, these points would be even more pertinent.
Im afraid I don't see why that would affect anything, sorry.

I hope that answers your question, though I must admit I don't really know what your question was.

[sidinz]

I'm not sure why I should be trawling through statements looking for expenses. It was made clear to me, by the Trust expert who set it up, that I personally, as a beneficiary (not Trustee, as the Trustee is a company) was responsible for any expenses. The only point I'm a little unclear on (will have to look at deed) is principal repayments, but a forgiveness of debt would sort that out.

If a property is set up in a Trust for my benefit, why can't I rent it out (providing there's no clause restricting this in the deed)? Lots of people rent out buildings/apartments/rooms they don't own. Sometimes it's something they rent themselves: it's called subletting.

[Rosco]

My Trust is set up so that I (as beneficiary) am responsible for paying all expenses related to the house. Therefore the Trust does not have a bank account.
Under these conditions, would you still give the above advice?

Surely most cases where the house is the only asset in a family Trust, it would be set up in a similar way? Otherwise where would the Trust get the money to pay the expenses?

When I went away for work and rented out my place, I decided that a) as my Trust didn't have a bank account and direct debits were already set up from my personal account, b) part of the rent included personally-owned chattels, c) the issues involved with part-year returns, d) there were no impediments to me renting the place out in the Trust deeds, e) I would still have been personally responsible for paying the expenses, and f) there were insurance issues to think about, it was simpler to rent it under my name and file the tax accordingly. It would seem to me that in a space-sharing scenario, these points would be even more pertinent.

Hi SidiNZ,

I'm going to focus on the Trust and not tax/accounting again.

How do you record that you are responsible for paying the expenses relating to the house? There is nothing wrong with doing this, but the Trust (ie the Trustees ) need to make this decision as it is very unlikely to be said that way in the Trust deed. Each year the Trustees would normally have a meeting and all Trustees agree that the beneficiary (ie you) can live in the house rent free, and in your situation in return for paying the rates, insurance etc - that is one option.

If the Trustees had agreed for you to live in it rent free, then you could easily add to the minutes that the Trust is happy for you to sublet the property, then the rental income would be yours. But your expenses could be limited as you don't own the chattels to depreciate, and don't pay rent to the Trust for them. You would have the rates, insurance and interest etc as per your agreement with the Trust. You could improve this situation by having an agreement with the Trust signed by both parties.

You need a Bank account for a Trust. I have a bank account, you have a bank account, therefore a valid Trust would also have a bank account. If a creditor is ever going to challenge your Trust, this would be another arguement as to why it is a sham, ie it doesn't even have a bank account.

Ross

[Anthonyacat]

I'm not sure why I should be trawling through statements looking for expenses.

So you can claim them against your rental income at year end? I'm sorry, maybe I'm missing the point of your post. I thought you were talking about earning rental income. If so, you will want to minimise your tax liability by claiming all relevant legally deductible expenses.

And certainly listen to Rosco on the trust stuff, looks like he has more experience with sham trusts than I do. Though in the case of a small family trust with a single property (be it a family property or a rental) there aren't likely to be any creditors coming to be annoyed with you.

[speights boy]

And certainly listen to Rosco on the trust stuff, looks like he has more experience with sham trusts than I do. Though in the case of a small family trust with a single property (be it a family property or a rental) there aren't likely to be any creditors coming to be annoyed with you.

So what is the point in having it ?

[sidinz]

Hi SidiNZ,
it is very unlikely to be said that way in the Trust deed.

Yet that is exactly what the solicitor who set it up told me how it was done. I guess I will need to re-read it to make sure of the exact wording.

You need a Bank account for a Trust. I have a bank account, you have a bank account, therefore a valid Trust would also have a bank account. If a creditor is ever going to challenge your Trust, this would be another arguement as to why it is a sham, ie it doesn't even have a bank account.

Ross

Again, as I was personally supposed to pay all the bills, it wasn't deemed necessary to set up a bank account that wasn't going to have any money going in or coming out. The solicitor (Ross Holmes) suggested that a bank account could be opened at a later date, should the Trust ever undertake any income-producing activities. The Trust does have an IRD number, for which I enter a nil return every year.

I had thought that he was an expert who knew what he was doing. Was I wrong?