Renting out part of your home

Posted on 15th July 2020 by Kelsi Keep

If you decide to earn some extra cash during these difficult times by renting out part of your home this can impact your tax return in the year you earn the income as well as the tax treatment of your residence on sale of your property.  

Income and expenses  

The rental income you receive is generally regarded as assessable income. This means you:  

• must declare your rental income in your income tax return 
• can claim deductions for the associated expenses that you incur personally, such as interest on your home loan, rates and taxes, etc 

Good and services tax (GST) doesn’t apply to residential rentals, as such you are not liable for GST on the rent you charge. 

If you are only renting part of your home, for example a single room, you can only claim expenses related to renting out that part of the house.  

As a general guide, you should apportion expenses on a floor-area basis based on the area solely occupied by the renter (user) and add that to a reasonable amount based on their access to common areas. 

If you use the room in any capacity when it is not occupied, for example for storage or as an office, you can’t claim deductions for this unoccupied period.  

If you rent out all or part of your home at normal commercial rates, the tax treatment of income and expenses is the same as for any residential rental property. 

If you rent out all or part of your home at less than normal commercial rates this may limit the deductions you can claim. For example, if you rent to a friend at a reduced rate, the deductions you claim in relation to this income cannot be excessive. 

Note that payments from a family member for board or lodging are considered to be domestic arrangements and are not rental income. As this income is not assessable, you cannot claim deductions for expenses in relation to the earning of this income (interest, rates and taxes, usage costs, etc). 

Capital gains tax 

Generally, under the main residence exemption you do not pay Capital Gains Tax (CGT) if you sell the home you live in. However, if you have used any part of your home to produce income, such as renting out a room you are generally not entitled to the full exemption. 

To work out the capital gain that is not exempt, we need to take into account a number of factors, including: 

• the proportion of the floor area that is set aside to produce income 
• the period you use it for this purpose 
• whether you’re eligible for the ‘absence’ rule  
• whether it was first used to produce income after 20 August 1996 

You should keep a record of the dates your property is earning assessable income and advise us upon sale of your property. We can use this to work out the proportion of your capital gain that is exempt from capital gains tax. You can also contact us at any point during your property ownership to provide you with an estimate of the non-exempt portion of any gain on the potential sale of your property so that you are not caught off guard by an unexpected capital gain.