2 Rentals Owned by Family Trust, Moving Into 1 of The Houses with Home Office Too

[Wuket]

I have a family trust with 2 properties in it. These have been rented out and I have been filing tax returns.

I also have a sole trader home business. Up until now we have been renting other homes and I have been claiming the home office deduction in accordance with the rules.

Next year we are moving into one of the trust homes though. I am not entirely sure how to account for the home office part and which is best. Does:

1. The trust allow us to live their rent free as trust beneficiaries (I could not claim the home office and I would need to top up the trust by way of making gifts each year, so it had enough cash to pay the mortgage, rates etc). The trust would go to making a definite loss each year (expenses of two properties, but only the income of one rental property + my gifting which is not income?) OR

2. The trust rent/lease the house to us. I could then claim the home office expenses in the normal way too. My only question under this scenario is how to set the rent. What are the rules around that?

Thanks

[Anthonyacat]

This is a fairly complex calculation, you should ask your accountant (or get one, if you've been doing it all yourself). Also it can be a bit contentious whether the IRD will allow you to pay rent to the trust and claim its expenses.

From a pure tax perspective, it's safer (and probably better as well ) to get the place rent-free. The benefit of a home office claim pales in comparison to the extra trust tax resulting from paying rent.

Also, while you're correct that the trust would be making losses each year, it would not be making tax losses each year. The expenses relating to the home you're using would not be deductible to the trust.

Again I highly recommend you speak to your accountant about this.

[Perry]

From a pure tax perspective, it's safer (and probably better as well ) to get the place rent-free.

Is there a mortgage involved?

While living there rent-free, the Trust could be seen to be in an awkward position, despite you being a beneficiary, depending on whether or not there are other beneficiaries.

Perhaps Anthony might comment on an alternative? One where your home business or you pay all the Trust's costs in relation to the property you live in? Then claim a part of those against your business activities.

[Anthonyacat]

The OP has emailed me to discuss directly.

But for the benefit of the forum, yes, what you suggest could certainly work. A minute declaring that they can live in the house in exchange for paying all related costs from their own pocket. Assuming the trust deed doesn't disallow this.

The trust could potentially be seen in an awkward position by the other beneficiaries, but legally it is unlikely to be an issue - most trust deeds state that trust assets can be used for any one beneficiary at the exclusion of all others, if the trustees so desire.

[sidinz]

Yep, you need to check what the deed says. Mine says that I can live in the house rent-free provided that I pay for all outgoings. If yours was bought to be a rental, it may not have such a clause.

[Wuket]

Thanks everyone, the trust deed allows the trustees to:

To lease any part of the Trust Fund to any person (including any Trustee or Beneficiary) on such terms as the Trustees think fit and to accept renewals or surrenders of leases. This includes the power to allow a Beneficiary to occupy or use any property that is part of the Trust Fund either free of charge or on other terms approved by Trustees.

Also regarding

But for the benefit of the forum, yes, what you suggest could certainly work. A minute declaring that they can live in the house in exchange for paying all related costs from their own pocket. Assuming the trust deed doesn't disallow this.

There is nothing in the trust deed that disallows that (in fact I think the clause above specifically says that's OK).

Finally, yes there is a mortgage on the property.

Thanks everyone for the advice so far.