Bess and Chris are adult siblings. They each own their own house, with each house being worth approximately $1.5 million. They also each a have large mortgage on their house. Given the recent rise in interest rates, Chris over dinner makes a suggestion to Bess. It involves them moving into each other's house, and charging each other fair market rent of $800 per week. The advantage of this is that although they will each have to add the $800 a week rent received from the other as income (approximately $40,000 a year), they can each deduct their mortgage interest, which is about $70,000 a year, given that each house would become income producing. This deduction can be used to reduce each sibling's overall tax bill. Bess agrees to this, as she likes the idea of saving tax - but she also prefers the location of the house Chris owns, as it is closer to her workplace.

Required: For Bess, discuss the possible application of ITAA 36, Part IVA to the house swapping arrangement

Answer rating: 100% (QA)

The house swapping arrangement between Bess and Chris involving the exchange of residences and charging each other fair market rent could potentially ... View the full answer