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Q&A 10 December 2018

Q: We are about to leave Sydney for a month on an overseas trip and have been thinking about renting the house in our absence. We have a four-bedroom family home and, apart from occasional guests, three of the bedrooms are not used. We travel regularly and have been thinking of entering into a regular rental arrangement with Airbnb or some other service for the times we are away. What are the tax implications of doing that?

A: Renting your home can create extra income but it comes with tax consequences. First of all, the income will need to be included in your tax return each year that you earn income from your property.

A potential downside is that if you use your principal place of residence for income producing activities you may be subject to capital gains tax on the income producing portion of your house when you sell.

Don’t be tempted to leave out the income or capital gain from your house or room renting activities when you file tax returns, as the tax office uses increasingly sophisticated data matching systems to find any missing income. I suggest that you work with your tax agent to ensure that you correctly calculate the capital gain when using your house for Airbnb or any other income earning activities in the house.

Financial planning issues to consider when renting the spare room or granny flat include:

  • apportioning the deductible expenses associated with the income producing portion of the home;
  • the home mortgage – can you claim some of the interest costs?

For some people it works better to rent out the home on an ongoing basis and rent elsewhere. The home retains its main residence status for capital gains tax purposes for six years unless you purchase another home. This can be a more efficient use of funds from a debt reduction and tax minimisation perspective.

In August the ATO announced that it was launching a data matching program to identify taxpayers receiving income from short-term rentals.

The ATO will examine information from online sharing sites for around 190,000 people to identify taxpayers who have left rental income out of their tax returns or over-claimed deductions.

The ATO will source information on rental platforms and match it against the information included in tax returns. The data collected will include income received per listing, listing dates, inquiry and booking rates, and prices quoted and charged per night.

As well as looking for undeclared income, the ATO will use the program to identify taxpayers who list properties that they have no intention of renting but then claim deductions they are not entitled to.

In 2016, around 2.1 million individuals reported rental income of $42 billion. The ATO says the rental market is a significant share of the economy and high on the its priority list.

The ATO’s rules for rental income are:

  • declare any income from renting all or part of a house or unit, even if it just a one-off;
  • only claim deductions for periods when the property is rented out or is genuinely available for rent;
  • where the main residence is being rented out, deductions can only be claimed for periods when it is actually rented;
  • if a property is rented at below market rates, deduction claims are limited to the amount of income earned; and
  • keep accurate records.