Live-in landlords are becoming more common as the community continues to adapt to the changing property market. First home buyers want to get onto the property ladder sooner and the idea of having tenants to help cover the cost of mortgage repayments is an appealing pathway. While rental income is a clear benefit of being a live-in landlord, it’s also worth considering the tax benefits.
Is renting out a room tax deductible?
You may have already asked yourself, is renting out a room tax deductible? The answer is yes. You’re entitled to claim a portion of your living expenses including:
- water and electricity rates
- council rates
- interest on your mortgage
- body corporate fees.
You’re also entitled to claim property depreciation. Property depreciation refers to the natural wear and tear that occurs to a building and its assets over time. The Australian Taxation Office (ATO) allows owners of income-producing property to claim this wear and tear as a deduction each financial year for up to forty years.
Depreciation can be claimed under two categories: capital works and plant and equipment assets.
Capital works deductions relate to claims for the wear and tear that occurs to the structure of the property and any fixed items like the roof, walls, doors, kitchen cupboards and bathroom tub.
Plant and equipment assets are the easily removable fixtures and fittings found within the property. Some examples include carpets, blinds, air conditioners, hot water systems, smoke alarms and ceiling fans.
How much depreciation can I claim?
If you own your home and lease out a room, you’re entitled to claim depreciation for the portion of the house that is income-producing. The percentage you can claim is based on how much of the property is being leased.
For example, if you own a two-bedroom apartment and you lease the second bedroom, you’ll be able to claim depreciation for that bedroom. You may also be eligible to claim a portion for shared areas like the bathroom and kitchen.
According to the ATO:
As a general guide, you should apportion expenses on a floor-area basis based on the area solely occupied by the renter and add that to a reasonable amount based on their access to common areas.
You can only claim expenses for when the room was rented. If you use the room in any capacity, for example for storage or as an office when you do not have guests staying, then you cannot claim deductions for expenses when the room is not occupied.
A tax depreciation schedule will outline the depreciation deductions available and an accountant can discuss the final percentage you’re able to claim based on your financial position.
It’s important to note that you don’t need to own or rent the property for a full year to claim depreciation deductions at tax time. You’re eligible to claim pro-rata depreciation deductions for the period the property is rented out or genuinely available for rent. This means if your property has only been owned and rented for a short period of time or has been used as a holiday home for both private and income-producing purposes, you can still benefit from claiming depreciation deductions.
What if I’m renting the room to a family member or friend?
If you lease out a room to a relative or friend at less than normal market rate, it will limit the deductions you can claim. However, if your flatmate is paying rent at a reasonable market rate and you have a tenancy agreement in place, you will be able to claim your expenses as tax deductions.
It’s important to have thorough records of rental income and expenses so that you can claim everything you’re entitled to. It’s also important to note that payment of board is not the same as rental income and does not entitle you to claim depreciation deductions.
What happens if I move out of the property?
If you decide to rent out the whole property after living in it, you won’t be able to claim for any existing plant and equipment assets as they will be deemed second-hand under current legislation. You will still be eligible to claim capital works depreciation and any new assets you install once the property is being utilised as a rental property.
Are there tax implications if I sell the property?
If the property is your main residence, then you don’t typically pay any Capital Gains Tax (CGT) when you sell it. However, if you’re renting out a room you may not be eligible for a full CGT exemption.
According to the ATO, live-in landlords need to consider:
- the portion of floor area used to produce income
- the period of time it produced income
- whether it was first used to produce income after 20 August 1996.
It’s always best to discuss CGT with a trusted accountant as they will be able to assess your full financial position. It’s also important to have a tax depreciation schedule prepared as it will provide your accountant with all the depreciation information they need to help you claim maximum deductions.
To find out more, Request a Quote or speak to the expert team at BMT Tax Depreciation on 1300 728 726.