Investment properties are generally that, a form of investment. Thus, it does not usually equate to being any kind of ‘business’ perse. However, there are exceptions, as with everything.
According to the partnership agreement, if you are in a joint partnership over a rental property, you are in a business partnership. The agreement states, “You should divide your net rental income or loss between the partners equally”. But of course, there is flexibility with how you choose to separate the rental income.
So, how do you know if you are in a rental property business?
The Smiths are a couple who own multiple rental properties. Together, they own eight houses and three apartment blocks, adding up to a total of 28 properties. Now, that’s a lot of properties and with that comes a lot of responsibility. The two of them undertake all financial planning and decision making in regards to the properties. Also, they interview all the tenants, collect their rents and carry out regular inspections of the properties. They also tend to all the maintenance and repairs themselves or ensure a professional is coming to fix the issue. They have the time to do this because apart from this, they have no other source of income as neither of them works.
So, naturally, the Smiths are carrying out a rental property business. This is evident through; the significant size and scale of the rental property activities. The numerous hours the Smiths spend on the property and the business-like manner in which the properties are looked after and organised.
Mr and Mrs Smith had a written agreement created for them, agreeing that they are running a rental property business. This is an excellent idea if you are involved in something similar to the Smiths. They agreed that Mrs Smith is entitled to 75% of the profits or losses from the partnership, while Mr Smith agreed to 25% of the profits and losses.
Getting a written contract means it is legally binding. So, in regards to the Smiths partnership agreement, their net profit or loss is divided 75% and 25%. Even despite their physical efforts with helping with the properties matching 50/50.
If you own a property either as a tenant in common with another person, let your part of a property to your co-owner at a commercial rental rate, or do not live in the property, the rent received is accessible income.
Common property is included in the strata plan according to the Australian Tax Office. It refers to the stairways, lifts, passages, common garden areas, common laundries and other facilities intended for common use within buildings.
Now, the ownership of the common property alters depending on the relevant state strata title legislation. Regardless of which state you live in, the income received from the use of the common property is income of lot owners. A quantity surveyor will work out the deductions you can claim for capital works and the decline in value of depreciating assets that form part of the common property, in proportion to your lot entitlement.