Tax obligation for a sublease agreement

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MJoseph

Lead

23 Points Posted on 20 May 2014

We ( two bro) are having a commercial building which is in the name of my Father. We are now renting out to a single party with three separete 11 months rental agreement ( floor by floor) in

one n my name

one in my brother's

one in my Father's

Now the party to whome we are renting out is advising my father ( building in Father's name) to have a sublease agreement with we both.

1> Is it advisable to have a sublease agreement like that?

2> if sublease come into existence, then howz the tax liabailty on the income we are receiving, shold my father is liable for all income or it will get splitted among us accoridng to the rental agrement.

Please help

Replies (2)

praveen

Chartered Accountant

5709 Points Posted on 20 May 2014

You could actually have such an agreement and it could be worthwhile as well. It may help you save taxes.

You father first lets it out to you and your brother and later u let it out to the client. For your father the rent he charges from you will be income from house property for which he will get 30% standard deduction.

For you sub renting becomes income from other sources against which you reduce the rent you are paying it to your father. Further you could also deduct expenditures you might have to incurr on the building in the future as well. You need to compute the cost benefit ratio and take decision accordingly.

Please visit capraveenmr.wordpress.com for any clarifications contact me at mrpraveen @ live.com

Mihir

Wealth Manager

5358 Points Posted on 20 May 2014

If you two brothers are not the owners of the property, you cannot enter into rent agreement with the third party acting as a landlord. Your father is the owner and landlord for renting purpose.

You may enter into rent agreement with your father who will lease you the property for a meagre sum, and in turn, the leased property is further subleased to a third party by you entering into rent agreement with the third party. Rental income of your father shall be taxed under the head income from house property, and for both of you, income from other sources. Your father may claim 30% deduction but you two brothers cannot.