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Find out the tax benefits of renting out a room

BMT team — Tue, 21 Apr 2020 23:46:25 +0000

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. In this article we will look at: Is renting out a room tax deductible? How much depreciation can I claim? What if I’m renting the room to a family member or friend? What happens if I move out of the property? Are there tax implications if I sell the property? 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: internet 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.

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The landlord’s guide to the changes in NSW and VIC residential tenancy laws

BMT team — Tue, 24 Mar 2020 22:08:47 +0000

Long-term renting is on the rise and there’s increasing pressure on both state and federal governments to do more for tenants. Recent changes to the residential tenancy laws in NSW, soon to be followed by VIC, are aimed at protecting the rights of tenants. For landlords, understanding these reforms will help them adapt to the changes and continue to have a reliable investment property strategy. Contents Overview Changes in New South Wales residential tenancy laws Changes in Victorian residential tenancy laws What do the changes mean for landlords? Insurance check-up Depreciation deductions Overview Changes in New South Wales are now in place, with changes in Victoria set to be placed on any lease signed after July 1, 2020. Other states and territories across the country are currently under consultation and are expected to introduce reforms within the coming years. Reforms vary in each state, however all will be limiting rent increases, relaxing rules for tenants wanting to make minor property modifications and allow domestic violence victims to terminate a lease agreement early at no extra charge. Changes in New South Wales residential tenancy laws The NSW Government Department of Fair Trading advised that the changes aim to reduce disputes over repairs, increase protection and certainty for tenants, and to further clarify the rights and obligations of tenants. Key points: All rentals must be ‘fit for habitation’ and meet the Government’s seven minimum standards There are new smoke alarm maintenance obligations New mandatory set break fees now exist for fixed-term agreements There are new water efficiency measures for all existing and new tenancy agreements You can find a full list of changes here Changes in Victorian residential tenancy laws The Victorian Government introduced the reforms as part of their Fairer Safer Housing review. They reforms focus on strengthening tenants’ rights and to provide more security and support. Key points: Landlords can’t unreasonably stop their tenants having a pet, unless they have an official order from the governing body A landlord ‘blacklist’ has been introduced Rent increases outside fixed-term agreements are limited The 120 day ‘no specific reason’ notice to vacate for periodic residential rental agreements has been removed You can find a full list of changes here What do the changes mean for landlords? Debates surrounding the reforms argue that they will discourage investment and in turn, drive up rents as demand will outweigh supply. In reality, the rental reforms don’t mean chaos for investors. These reforms won’t be the last in history and landlords must adapt to the changes to continue to have a profitable and safe investment. The two top priorities for landlords as they adapt are to check that their current insurance will continue to provide the right cover, and to claim any depreciation deduction from compulsory improvements. Insurance check-up Every landlord must protect their investment with the right insurance coverage. Some of the reforms do have implications for insurance and every landlord should check if they will be affected. A key concern for landlords is the increased likelihood of pet damage, with many already picturing their property being destroyed by unruly dogs. Some landlord insurance providers don’t offer pet damage protection, while others have restrictions in place. Some examples of restrictions include capped limits to claimable pet damage or requiring the pet to be named on the lease. It’s important for all landlords to check-in with their insurance provider before the reforms are in place. There are plenty of landlord insurance options out there, and it’s key for property owners to make sure they have the best suited coverage. Depreciation deductions While some of the new reforms do mean landlords will need to make changes to their rental property, they will be able to maximise their cash flow in depreciation deductions from any improvements. A good example of this is in the New South Wales reform of new water efficiency measures. The measures make it compulsory for rentals to have a dual flush toilet, which can mean a small renovation to an investment property’s bathroom. The landlord will then be able to benefit from the depreciation deductions available from the improvement. The minor modification reform is one of the most concerning for landlords. However, savvy owners can turn this reform into an advantage and establish more loyalty with their tenant. An open conversation between tenant and property manager can allow the landlord to offer to make the minor modification themselves. Minor modifications such as fly screens, installing curtains and blinds or glass frosting are commonly placed in the low-value pool and depreciated at an accelerated rate. While it’s still an upfront cost for the investor, the low-value pool will allow them to reap the depreciation benefits sooner. For more information of how you can benefit from the many depreciation deductions available for your investment property, contact the specialist BMT Team on 1300 728 726.

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New research and insights feature in MyBMT

BMT team — Fri, 22 Jun 2018 04:40:51 +0000

When purchasing an investment property, it is crucial to undertake area research to gauge if a property will be a suitable, profitable investment. BMT Tax Depreciation has developed a new feature within its online portal MyBMT helps property investors make more informed decisions relating to their investment property. The new research and insights tab assists investors to learn more about the area in which a potential investment property is located. The feature allows investors to discover newly listed properties in their area as well as important metrics such as recent census data, information that can assist the decision of whether to take on an investment property. The research and insights tab also informs investors of any lodged planning applications and new developments in the area so there are no surprises after purchase that could decrease the property’s value. Investors often struggle to know the true value of their investment properties in the ever-fluctuating market. Using the MyBMT research and insights feature, investors can generate a metric-based valuation for their investment properties which have a depreciation schedule in MyBMT. Another useful tool included in the research and insights tab is PropCalc. PropCalc is a innovative calculator that can help you determine the cash flow required to hold a property. It uses data such as income, stamp duty, deposit amount, expenses, rental income and tax depreciation figures to provide an accurate after tax figure. PropCalc is an essential tool for investors considering the purchase of an investment property. It comprehensively calculates the costs associated with holding an investment property and thereby assists investors to determine whether a property is right for them. The new research and insights feature in MyBMT centralises the work involved in purchasing an investment property and assists investors to make smarter financial decisions. To explore the new research and insights tab, register for MyBMT today.

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Equally important objectives, but not a level playing field

Simon Pressley — Fri, 30 Jun 2017 04:57:44 +0000

The property investor and the owner-occupier: while their primary motivations for buying a property might be different, they both have legitimate and equally important reasons. Consider this scenario. Mary (an owner-occupier) and Jane (an investor) are both interested in buying a particular property worth $450,000. Mary is motivated by how the property satisfies her and her family’s important lifestyle needs at this stage of their lives. Just as important, Jane is motivated by the goal of being able to afford a particular lifestyle later in life which a (forever shrinking) taxpayer-funded pension will not provide. But, the costs to the property owner are quite different, depending on whether it’s Mary or Jane who becomes the eventual owner. For the purpose of this exercise, let’s assume this property is located somewhere in the state of Queensland. Mary will pay approximately $8,400 in stamp duty for the property while Jane will be slugged at extra $7,000 if she buys the property with the intention of providing shelter for third parties, as opposed to herself. All property owners would hopefully acknowledge the importance of neighbourhood parks, footpaths, roads, and services such as rubbish removal which are funded by council rates. But, even though they quite possibly don’t directly benefit from any of these services, many city councils charge a higher levy to an investor than an owner-occupier. Even though Mary and Jane may have borrowed the same amount of money to buy this hypothetical $450,000 property, in this financial climate, Jane will pay between $1,500 and $2,000 extra interest on her loan each year than Mary. Recent interventions by the Australian Prudential Regulation Authority have resulted in investment property loans incurring 0.6 per cent to 1 per cent higher interest rates. Fast forward (say ten years from now) and Mary or Jane decide they wish to sell the property. Mary’s personal circumstances may require her to move house whereas Jane’s equally important circumstances may necessitate her to sell to support her retirement. If Mary sold the property as an owner-occupier she would retain 100 per cent of the sale proceeds whereas Jane would be liable for capital gains tax (a figure that could be six-digits). This scenario provides important context for the segment of Australia’s population whom (quite strangely) seem to think that investors have advantages over owner occupiers. To the contrary, investors pay extra in more ways than one. So, no, it’s not a level playing field – investors well and truly pay full freight. At the end of the day, it shouldn’t be an US (owner-occupier) versus THEM (investor) thing. The personal motivations of Mary and Jane are both important and ought to be respected accordingly.

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