We are seeing a trend of property owners renting out part of their homes to help pay for their mortgage. Some are renting out one, two or even more rooms at a time. Some are even reconfiguring houses into smaller living style pods, where rooms have their own bathroom and kitchenette.
Not only can renting out a room help the property owner with their mortgage payment though additional income, creates the ability for them to claim the associated tax deductions available to them in line with the ATO’s as per the ATO.
When a residential investment property is income producing you are entitled to claim for expenses relating to renting out that part of your property. These expenses will form tax deductions to help reduce your taxable income.
According to the Australian Tax Office:
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. This means you can't claim the total amount of the expenses you incur – you need to apportion the expenses.
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.
You can only claim a deduction for expenses when the room was rented to a client. If you use the room in any capacity when it's not occupied, for example for storage or as an office, you can't claim deductions.
If you rent out all or part of your home at less than normal commercial rates – for example, you rent to a relative or friend at a reduced rate – this may limit the deductions you can claim.
Note that payments from a family member for board or lodging are considered to be domestic arrangements and are not rental income. You can't claim deductions for expenses in these circumstances.
One of the biggest deductions that you can claim, is the rental property depreciation deduction.
Rental property depreciation is a deduction that property investors are entitled to claim for the wear and tear on their investment property. Whether you rent out your whole residential property or just part of it, you can claim the rental depreciation deduction.
You will need to organise a tax depreciation schedule. A tax depreciation schedule is completed by a qualified quantity surveyor. They are recognised by the ATO to estimate how much you are entitled to claim in depreciation deductions.
A tax depreciation schedule will be prepared by the quantity surveyor, and the total results reported in financial years (generally over a 40 year period). Your accountant will decide what portion of these deductions you can claim and will use this value against your property depreciation results.
For example, if your accountant has worked out that 25% of your property is income producing, then the property depreciation amount x 25% = what you can claim as a tax deduction.
The Australian Taxation Office states:
Generally, you don't pay CGT if you sell the home you live in (under the main residence exemption).
However, if you've used any part of your home to produce income – for example, by renting out all or part of it – you're generally not entitled to the full exemption.
To work out the capital gain that is not exempt, you need to take into account a number of factors, including:
You can work out the proportion of your capital gain that is exempt from capital gains tax using the Property exemption tool.
Capital Claims Tax Depreciation can offer you a free estimate of the total deductions you can expect to receive for your rental property depreciation. You can then take our estimate to your accountant and see if it is worthwhile.
To receive an online estimate click here or we are always happy to have a chat about your investment property circumstances, call us on 1300 922 220.
Mark is an expert quantity surveyor, business owner, public speaker and property developer. With 20+ years experience in the construction and quantity surveying industry Mark’s specialist expertise have been sought in consultant capacity by professional bodies such as the National Institute of Accountants and the National Tax and Accountants Association, and he has presented at various property and tax seminars and expos nationwide. Mark holds a Bachelor of Construction Management from the University of Newcastle, is an affiliate member of the Australian Institute of Quantity Surveyors and a Registered Tax Agent.View all posts by Mark Wilkins