If you are considering renting out a room or part of your home it is worth doing your homework regarding the tax implications of this decision.
With the rising popularity of the sharing economy and websites such as AirBNB and Stayz, the opportunity to rent out a portion of your home to generate additional income is certainly very appealing.
Whilst you are required to declare the rental income you receive in your tax return, you are also entitled to claim a tax deduction for expenses related to renting out that part of your home.
This could include a portion of your mortgage interest, rates, electricity, water and other expenses associated with maintaining the part of your home that you are renting. The calculation needs to consider the area occupied by the renter and the number of days the area was occupied over the year. Keeping accurate records of all income earned and allowable deductions for which you are claiming is a requirement of the ATO.
But one thing that some AirBNB hosts have not yet realised is that they may not be entitled to claim the full main residence exemption from Capital Gains Tax (“CGT”) when they sell their home.
When you have used any part of your home to produce income, this portion may become subject to CGT. CGT is calculated at the time of selling your home but is affected by events throughout the period of ownership.
So how much tax could you be looking at? Well, it depends on how much of your property is rented out and for how long.
Example: Running an AirBNB business in part of a home for part of the period of ownership
Jana bought her house under a contract that exchanged on 1 January 2001 and sold it under a contract that exchanged on 31 December 2017. It was her main residence for the entire time.
For half the period Jana owned the house, she rented out part of the home using AirBNB. The floor space rented represented 25% of the total floor area of the house.
Jana made a capital gain of $320,000 when she sold the house. The following proportion of the gain is assessable:
$320,000 × 25% × 50% = $40,000
Jana will be able to further reduce her taxable gain by the 50% CGT discount given she owned the home for greater than 12 months. Her Capital Gain then becomes $20,000 (i.e. $40,000 x 50%). This is the amount that will be included as income in her tax return in the year she sells her property (i.e. the year ended 30 June 2018).
If you would like to discuss the tax implications of renting out a room or part of your home, please contact us on 6621 2257.
This information and the links provided are for general advice only and do not take into account your specific situation and, accordingly, should not be taken as constituting professional advice.