With the landscape of the world-changing, to gain an extra dollar, landlords have become more common. As many people decide renting out rooms in their own home while still living there. This can have many benefits including paying the mortgage, covering running expenses. And even filling up space that was anyway unused. In exchange for leasing out a room or part of your home, you will receive rent. This rent is treated as “assessable income” by the ATO. And is required to be reported in your annual tax return.
When you lease out part of your home, you will receive payment in the form of rent from the tenant. This money received is income. And will need to be reported on your tax return. So it is important to keep a spreadsheet of all income received between 1st July and 30th June each Financial Year. However, this does not mean you cannot claim any deductions against this income. To reduce your taxable income and perhaps boost your refund. Below are the deductions you can claim.
Firstly, you should always look to keep a good, steady habit for keeping receipts and records. We at R T Accounting & Taxation Services are on hand to ensure that you keep good recording habits throughout the year. It is not very complicated. Just need to keep a file of receipts and/or an excel file about any expenses or costs in relation to the rental of your property. Along with the income mentioned previously.
This record will be useful for us at tax time. As we will be able to capture all income and costs seamlessly. Which can help you reduce your tax bill and get more in your pocket. Remember it is wise to keep your receipts, so ensure to keep all receipts. Even if you are in doubt as to whether they are a deductible expense. That is what we are here for. To guide you and help you reduce your tax payable as much as possible within the means of the law.
The Apportion method is the simplest way of deducing any tax deductions with the rental of part of your property. This method requires a simple calculation of the floor space of your home leased out to a tenant. And a reasonable percentage allowed for shared common areas such as a shared bathroom, living room, dining room, kitchen, etc. For example, if you were living alone in a 2-bedroom, 1 bathroom apartment, an appropriate apportionment would be 50% shared expenses. And each person has 1 bedroom and other amenities are then shared.
It is also common for the tenant to pay for part of the running costs. Such as electricity, water, internet, etc. on a weekly or monthly basis. We will need to report this as rental income. However, we can then claim back these payments as expenses, rendering it to a nil effect.
Tom owns a 2-bedroom apartment. He decides that since one of the rooms is empty and the apartment is located near a university, that renting out the other bedroom is a logical move. A student moves in and pays $150 a week on a year’s contract. The floor area of the rented bedroom is 10m^2, which amounts to 20% of Tom’s 50m^2 apartment unit.
Tom’s expenses include her interest on loan repayments for the mortgage, building insurance, body corporate fees and water. This amounts to approximately $20,000 for the year.
Tom should report $7,800 rental income for renting out the bedroom, as well as 20% of the $20,000 expenses mentioned previously, amounting to $4,000. Tom should also keep all receipts and records of expenses incurred during the year, which will make our job at tax time a much smoother process.
Generally, any expenses incurred in running the home is claimable.
Common deductions include:
- Internet costs
- Home landline costs
- Water, electricity, and council rates
- Repairs and maintenance
- Depreciation on the cost of furnishings and equipment
- E.g., furnishing the spare bedroom with an actual bed and linen. This cost is tax deductible.
- Interest on loan repayments for your mortgage
- If living in an apartment block, any Body Corporate Fees
Renting Out a Room to Family & Friends
Sometimes, your family or friends could be in a bad situation in that they might need a place to stay. This can come with a red herring, as the ATO assumes you are making the most of your property’s rental investment potential. If you are intentionally receiving less than market rent, ATO requires you to apportion your expenses downward in line by the same proportion you have reduced your rent to your friend or family.
For example, if you rent a room to your brother at half market rent, you must divide your apportioned deduction claims by half as well.
Taking our earlier example, if Tom rents the spare room to his brother for $75 a week instead of $150 a week, Tom should report $3,900 as rental income. However, if total yearly expenses amount to $20,000 for the year and 20% of apartment space is taken up by the second room. This would previously mean that we could have reported $4,000 in expenses. However, since Tom is only accepting 50% of market rent from his brother, he must then reduce the $4,000 by 50% as well and can now only claim $2,000 in deductions.
So, please keep this in mind when renting out a room to a family member or friend at a discounted rate.
To calculate the market rate for renting a room, it is a pretty simple process. You can check on domains at other similar properties in the same areas as yours.
Working out live in landlord tax deductions when renting to family and friends can also be difficult so ensure that you consult us if you are not sure on what you can and can not claim. It is imperative that we get this section correct, as the ATO can go in and amend your returns if they feel something is amiss.
Are You Liable for Capital Gains Tax?
The law is that if you sell the home that was your own main residence, you are not liable for Capital Gains Tax (CGT) deducted from the sale price. However, the moment you start renting space in your home, it becomes a touch more complicated.
This means, the moment you rent your home out in part to a tenant, you are then no longer entitled to the full “main residence exemption”. What this means is that when you sell the home, you will need to pay some CGT, at the rate that is adjusted based on how much of your house was rented for and for how long.
However, this is a simple process in that all we need to do is calculate a couple of numbers.
- Determine the area of the total floor area that is set to produce rental income.
- Duration in which you have used this floor area.
Using these two figures you should be able to work out the total days your property was rented out of the total days you owned the property.
Using the previously mentioned example, Tom’s rental space totalled 20% of his home. He owned the property for 5 years and rented out the room for 4 of those years.
When he sells the property, if he has made a gain, he will need to pay 80% (4years/5 years) of the 20% of the full CGT for the property. This amounts to 16% of the full CGT of the property.
Renting out a spare room can offset some of your household costs and help you pay off your mortgage. In saying that there can be some future downsides, with the big one being the future cost of CGT. Be sure you measure out the pros and cons of renting out a spare room. If in doubt, do not be afraid to get in touch with the tax agents at R T Accounting & Taxation Services who can help guide you through this tricky process.