Airbnb reports that as inflation in an area rises, so too does the number of Airbnb hosts, as homeowners seek to cover rising mortgage repayments. Whilst additional income may be welcome, it is important for homeowners to be aware of the tax implications of renting out their primary residence.
Income Tax and Deductions
Income generated by rental of your home must be declared on your tax return. If you are renting out your home on an occasional basis you can claim a deduction for related expenses. Some expenses, such as advertising the property, photography for listings, and real estate commissions can be claimed in full. Others, such as council rates, interest on a loan for the property, electricity and gas, insurance and cleaning costs must be apportioned based on the number of days the property was rented out during the year, and/or the portion of the property (by floor area) that was rented out, for example if you only rented out one room.
For reporting income and claiming expenses, keeping accurate records to justify your deductions is essential. The ATO has a focus on taxation of the sharing economy and utilises data provided by rental platforms to identify people who are not meeting their taxation obligations when it comes to renting out part or all of their property. Where rental expenses exceed rental income, an assessment on whether the rent being charged is below market may be conducted, and the ATO are alert to homeowners who list a property as available however are not proactive in securing tenants.
Capital Gains Tax
Capital Gains Tax is payable when you make a profit on the sale of an asset including property. A capital gain from the sale of your main residence is usually exempt from CGT. However, if your main residence is used to generate income, for example through short term rentals, you will no longer be eligible for the full CGT exemption. A portion of the exemption will be lost based on the floor area rented and the length of time it was rented. Depending on how long you have owned the property and your plans for future sale, the impact on CGT should be considered by homeowners prior to renting out their home.
For more detailed advice about renting out your primary residence and the tax implications, please contact us on (02) 9908 9888.