TAX IMPLICATIONS OF RENTING OUT PART OF YOUR HOME

Thinking about renting out spare rooms in your home to help with the mortgage?

Have you thought about the tax implications of renting out part of your home ?

I have been asked on occasion whether you can claim expenses if you rent out part of your home. It seems that people have heard the benefits of renting out their home, but haven’t been informed of the costs.

What circumstances are you able to claim expenses and how will this affect your tax liabilities?

If you receive assessable rental income you are to declare this in your individual tax return. Depending on your circumstances, you may be able to claim a portion of the associated expenses. If your expenses exceed the income received, this can reduce your income tax liability. Simple enough? However, you are only able to claim the associated rental expenses if you rent part of your home at commercial rates. I would suggest researching the houses in your area for comparatives to get an approximate amount you can charge for the space you are providing. If you charge rent at a lower rate you will limit your ability to claim the expenses. If you charge rent below commercial rates to relatives who are boarding for domestic use, this will not be considered assessable income. You will not declare this in your tax return and therefore are unable to claim any expenses.

 So what is the tax liability associated with renting out part of your home?

Once you earn assessable income on your home, you may not be entitled to the full main residence exemption when you sell the property. If part of your home is rented out for a consecutive period of six or more years you may have to pay capital gains tax on the income producing part of the house. If the capital gains liability is too high, is it worth renting out that spare room? Call Optima Partners to assess your situation and ascertain if there are any benefits.

Contributed by

 Andrea Allen, Accountant