Married Couples and Rental Properties – The Importance of Getting It Right

A Court has recently decided that a married couple’s agreement to pay the wife the rental income from a jointly owned property did not overcome the operation of Section 836 of the Income Tax Act 2007. As a result, the husband was assessed on 50% of the rental income for income tax purposes even though they had agreed that the wife should receive all of the rent into her bank account.

However, if the couple had entered into a Declaration of Trust recording their agreement then that would have been binding and the husband would not have been assessed for tax on 50% of the rents received. Unequal rent sharing agreements are common between married couples, particularly where one spouse is taxed at a lower rate.  This case highlights the importance of having these agreement properly documented (by a Declaration of Trust) confirming the percentage split and overcoming the problems where Section 836 applies.

For unmarried couples, Section 836 does not apply but nonetheless it is prudent to record any unequal rent receipts in a Declaration of Trust to help avoid disputes at a later date.