The popularity of online accommodation booking websites has been exponential, especially in light of the restricted overseas travel due to COVID-19. You may be considering renting out a room or your house as a means to earning some additional income. You may have thought that this income is not subject to tax, however, this is a myth and, in this article, we will discuss the key tax considerations.
There are three major tax considerations that you need to be aware of:
- Income in the form of rent
- Rental expenses and their potential tax deductibility, and
- Capital Gains Tax (CGT) on sale.
Where you rent out a room in your house, townhouse or apartment to the general public through a web-based platform such as Airbnb, the money that you receive must be recorded as income in your tax return. Unfortunately, there is no way around this.
On the other side, however, the expenses associated with the rented space (eg. the occupied room) are 100% deductible when incurred purely for the purpose of generating the rental income. Examples of these expenses include:
- Commission charged by Airbnb (or alternative service)
- Repairs & maintenance
- Cleaning products
- Professional photography for the listing/advertisement
- Depreciation on an installed air-conditioning unit, and
- Depreciation on any furniture you may provide to your tenant.
Your home’s operating expenses, such as council rates, utilities, insurance, and mortgage interest, will be deductible to a lesser degree. These expenses must be apportioned based on floor area and the period in which the property was available for rent/rented.
It’s important to note that once your home starts generating rental income, the property may no longer be entitled to the full Capital Gains Tax exemption but rather, only a partial exemption. To work out the capital gain that is not exempt, you will need to consider a number of factors including:
- proportion of the floor area that is set aside to earn income (that is: what space is being used by your tenant)
- period of time you used it for this purpose (how long was it rented/available for rent)
- whether you are eligible for the ‘absence’ rule (where you have not had another principal place of residence and did not live in this property for up to 6 years).
As always, remember to keep records of any income-generating activities. Come tax time, these records are proven to be valuable.
While we have provided a general summary of the tax implications, it is important to note that each case will need to be assessed on its own merits. For more information on the tax implications of renting out your home, please consult your William Buck adviser.