If the increase in the cost of living is stretching your finances thin, you may have considered renting a spare room to earn some extra cash.
It’s also a favourite strategy for first-time buyers looking to ease their mortgage obligations with a little extra cash.
While it can be a great way to earn income, you need to understand the tax implications to avoid any nasty surprises.
It’s essential to recognise that rental income is taxable and must be declared to the Australian Taxation Office (ATO). However, you can claim deductions for related expenses, but the extent of that claim will depend on the portion of property rented and the number of days.
Together with rental income, you must also tell the taxman if you have received any additional fees, such as bond money, and if you received any insurance payouts due to damages caused by the tenant.
Before we get into the deductions you can claim, you should know the implications of Capital Gains Tax (CGT) on your property.
Usually, your primary residence is exempt from CGT. However, if you rent out a portion of it, you may have to pay CGT on that portion if you sell your home at a profit in the future.
The ATO provides a CGT property exemption tool to help you calculate potential tax. However, for many owners, the risk of being hit by capital gains tax for the sake of the income from renting out a single room is too great.
On the upside, here are some of the deductions you can claim:
- Council rates.
- Mortgage interest.
- Utilities.
- Insurance.
- Cleaning and maintenance.
However, all such claims will be related to the portion of your home that you have rented.
We recommend consulting a financial professional or your accountant before committing to rent any part of your primary residence.
NOTE: The information in this article is general in nature and provided as a market overview only. Always consult your financial advisor or accountant for advice specific to your personal circumstances.