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Facts About Income and Deductions When Renting Out Your Home

If you want to rent out your home, or even a part of it, the rent you charge will be considered as assessable income for your tax return. This means that the money earned will need to be declared just like any other income (it should be denoted as ‘rental income’).

With this in mind, you’ll only be able to claim deductions for associated expenses for:

  • The amount of time that the room or property was rented out
  • The part that’s being rented (if the whole property isn’t being occupied by the rentee)

Income has to be declared by the property owners according to their lease interest or ownership of the property, regardless of who registers and how (via the internet or an agent). This will also apply to those with short-term leases who occasionally digitally let rooms.

If you sell the house or unit in question, you may need to pay CGT (Capital Gains Tax). Renting out a part of your property, even if it’s within the home you live in, is likely to result in you losing some of your CGT main residence exemption.

Because of this, it’s often crucial that you keep records of:

  • Any statements that prove the amount of income you earn
  • Any receipts for expenses that you want to claim a deduction on

How does claiming deductions work?

There are a number of expenses that you can claim deductions for, such as:

  • Council fees
  • If you have a loan for the property, you could claim a deduction for interest
  • Electricity and gas bills
  • Property insurance rates
  • The costs of cleaning and maintenance; either products purchased, or the cost of a commercial cleaner

In general, you should be able to claim a 100% deduction of these fees, or for any commission you’re charged by your chosen letting platform.

One thing that you’ll need to consider is how much of the expense you’ll be able to get a deduction on – as this could depend on:

  • How long the property or part of the building is rented out for during the year
  • How much is rented out (for example, whether it’s a house or just a room)

Renting out a room in your home

Even if you’re renting out just one room, you can still claim for expenses relating to that part of the property. While you won’t be able to claim a full deduction of certain expenses, you can make some money by dividing the expenses into private and income-producing purposes.

It’s often a good idea to do this based on the floor-area that your guest occupies, and to apply any additional expenses that come with your renter using common areas of your house (like the bathroom or kitchen).

It’s important to note that you can only claim a deduction for the time that the room has been rented out – any other days of the year, that part of the house will be considered privately used.

Here’s an example:

Let’s say you have a two-bedroom home with two bathrooms, located in a popular downtown area. You rarely use your second room for anything, aside from when you have guests or for storage. You have an ensuite bathroom and don’t tend to use the second bathroom, which can be accessed from the rest of the house.

To get some extra income, you decide to try renting out the spare room on a digital platform.

The room that you’re renting out is roughly 10 square metres, and your home is 80 square meters in total.

The guests will have access to all the common areas of the house, like the second bathroom, the living area and kitchen, which all together comes to about 50 square metres. You’ll also allow your guests to use the Wi-Fi for free.

While the guests are staying in your home, you’re able to claim a 50% deduction on any costs associated to the common areas of the property.

Imagine that the guests will only be staying for 150 days of the year.

In this instance, you’ll need to consider:

  • The size of the room (10 square metres)
  • The size of the house (80 square metres)
  • The size of the common areas (50 square metres)
  • How long the room is rented out (150 days)

Overall, you’ll be able to claim almost 18% off of your general expenses, because your calculations should look like this:

  • The room being occupied − (10÷80 × 150 ÷ 365) × 100 = 5.13%
  • The use of the property’s common areas − ((50÷80 × 150 ÷ 3 65) × 50%) × 100 = 12.84%

The claim of 17.97% will allow you to save a little money on things like mortgage interest rates, electricity, body corporate fees and more.

Additionally, you’ll also get to claim a 100% deduction on the expenses that are associated solely with renting out the room too, like the platform’s service fees (if they have any).

What if you only want to rent out your main residence occasionally?

You may be wondering what kinds of deductions you can claim if you only rent out your house (or part of it) occasionally.

This could be the case if you only rent out for a period of time while you’re away, or if you leave to allow your paying guests to stay.

Either way, the total expenses that you’ll be able to claim deductions for can depend on the portion of the financial year that the property was rented out.

Typically, you’ll find that you can claim a full deduction of any expenses that come solely from renting out the property to your guests, like service fees from the platform.

An example:

You and your partner are living in a one-bedroom property in the city and want to list it on a digital platform to rent it out. When you find the right guests, you move out to stay with your parents.

You’ll only be able to claim deductions on expenses based on the timeframe when the property was rented out, since it’s your main residence and you only left so that you could make some extra cash by renting it out for a short period of time.

Let’s say that you rented the property for 100 nights. Overall, you’d be able to claim nearly 28% of expenses (you’d need to calculate an equation like this 100 ÷ 365 × 100 depending on the time you rent it out).

For any costs that are solely associated with renting out the property (like the platform’s service fees), you can claim a 100% deduction.

 

Lindale Insurances Pty ltd ATF Lindale Insurances Trust ABN 27 027 421 832 is a Corporate Authorised Representative of Millennium3 Financial Services Pty Ltd AFSL 244252and ABN 61 094 529 987. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice and consider a Product Disclosure Statement. For Australian Residents Only.

Disclaimer: The views expressed in this publication are solely those of the author; they are not reflective or indicative of Millennium3. They cannot be reproduced in any form without the express written consent of the author.