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Property managers on owners and tax: Co-owners and the income split
When two or more investors own a rental property together, whether it is rented out all year round or only part-time, the division of rental income is defined by the legal interest that each owner has in the property. This legal interest can further be defined in two different categories.
Is the legal interest as joint tenants or tenants in common?
Co-owners who are Joint Tenants divide the income and expenses related to that property on an equal 50/50 basis. The interesting point to note here is that division of income and expenses in terms of legal interest overrides any verbal or written agreement that the two owners may have. It is irrelevant if one is earning more than the other, and would like to incur less taxes by claiming a greater proportion of the rental loss; the division must be in terms of legal interest.
Co-owners who own the rental property as Tenants in Common may have an unequal legal interest in the property. One may have a 30% legal interest and the other 70%. They would then split the income and expenses related to the property in terms of their legal interest, in this case 30% and 70%, again regardless of any other agreement that the two owners might have made.
If you are unsure whether you fall into the category of Joint Tenant or a Tenant in Common, reference to the title deed should clear up the matter.
As an investor am I running a rental property business?
Not necessarily. The tax man considers you to be an investor who is not necessarily engaged in a rental property business, as long as you don’t spend an inordinate amount of time engaged in rental property activities, you don’t co-own very many properties, and you don’t derive your income exclusively from the rental property.
If you are deemed to be in a rental property business, the partnership agreement between the partners takes precedence over the legal interest in the properties. The income and expenses associated with the business must be divided in terms of the partnership agreement. There will be more about the difference between investors and rental property business in the next Baxton Property Management article.
As specialists in property management in Hobart, Baxton Property Management is running a series of blogs to guide you through the minefield of rental property investment, and its attendant tax implications. In a series of informative articles on the Baxton website we will be dealing with many aspects of the new tax laws, as they apply to rental property owners.
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We hope you enjoyed this article
The information contained in this article is based on the authors opinion only and is of a general nature which is not indicative of future results or events and does not consider your personal situation or particular needs. Professional advice should always be sought relevant to your circumstances.
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