How do I allocate Rental Property Income Expenses?

Knowing how to allocate income and expenses related to rental properties that are owned by multiple people can be an important part of your Individual Tax Return. The ATO has specific rules which govern how rental income and expenses are allocated to the owners of the property. What it comes down to is: “are you owners of an investment, or are you carrying on a rental property business?” Unfortunately, this important distinction is vague. Factors the ATO use to consider if you are carrying on a rental property business are: • How many properties are owned? • How much time is devoted to management of these properties? • How are activities planned, organised and carried on?

I own a small number of properties with minimal personal involvement; how do I allocate rental income and expenses in my Income Tax Return?

Most Australians who own a rental property are not considered to be carrying on a rental property business, due to the minimal scope and owner-participation of the investment (ie one additional property). In this case, the ATO requires that all income and expenses are split in line with the legal interest in the property. The ATO disregards any partnership agreement which states a different income/expense distribution. • E.g. John and Jane are joint-tenants and hold 50% legal interest in a rental property each. Income and expenses are allocated by 50% to John and Jane respectively. • E.g. Luke, Mike and Sam own 20%, 30% and 50% of a rental property respectively. They also have a partnership agreement, which states 70% is allocated to Luke, and 15% each to Mike and Sam. Despite there being a partnership agreement, income and expenses are allocated by legal interest (20% to Luke, 30% to Mike and 50% to Sam) in their tax returns.

I carry on a rental property business; how do I allocate rental income and expenses in my Income Tax Return?

Allocation of rental property income and expenses is made in accordance with the Partnership Agreement. The Partnership Agreement will override the legal interest in the rental property. If you do not have a Partnership Agreement, you need to allocate income and expenses equally between the partners. • E.g. Luke, Mike and Sam own 20 rental properties, which are 20% owned by Luke, 30% by Mike and 50% by Sam. There is a partnership agreement which states income and expenses are allocated by 70% to Luke, and 15% to Mike and Sam respectively. • E.g. Luke, Mike and Sam own 20 rental properties, which is 20% owned by Luke, 30% by Mike and 50% by Sam. There is no partnership agreement. Income and expenses are allocated equally between the three partners.

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