Tax Deductions for Live-in Landlords

Leasing out a single room or space in your home and becoming a live-in landlord can be a good way to supplement your mortgage payments or general expenses. But did you know the payments you receive are generally classed as assessable income by the Australian Taxation Office (ATO)? This leaves the door open for you to claim multiple tax deductions in your tax return, but also face complex rules too.

Knowing your tax obligations as a live-in landlord is half the battle. Beyond picking the right tenant, balancing the financial benefits with the potential costs can be tricky.

When you rent out or lease a portion of your home, you will receive rent from your tenant/s. This money is classed as income and must be declared on your tax return for every year you are a live-in landlord. You claim this income at the Item 21 (Rental Schedule) section of your tax return.

Of course, like most incomes, you can claim tax deductions against the cost of gaining this income stream.

Keep good records!

Key to any tax deduction claim is good evidence. Maintaining steady, consistent and reliable bookkeeping habits will serve to safeguard you against ATO scrutiny, while boosting your potential tax deductions. Small habits like keeping receipts, logging expenses or ad hoc invoices will make your tax return that much easier. You’ll also need to keep a consistent log of your rental income.

Even if you are in doubt as to whether a purchase receipt will be claimable come tax time – keep it. Your tax accountant can sort through to make sure it’s a tax deduction, so you would rather keep an extra scrap of paper than miss out on potential deductions.

Typical tax deductions

With good receipts, you can commonly claim costs related to keeping your tenant such as:

  • Home phone and internet;
  • Council rates, power and water;
  • Home repairs and upkeep;
  • Furnishing and equipment depreciation;
  • Mortgage interest; and
  • Body corporate fees (if applicable).

Of course, not all these costs can be fully claimed. Some claims, such as phone and internet charges, will need to be apportioned between your own usage and your tenant’s.

Live-in landlord apportion method

Similar to the way people with home offices claim their tax deductions as a percentage of usage between personal and private use, you need to treat your home the same way.  This method for live-in landlords is referred to as the apportion method.

Generally, using this method requires you to determine the portion of your tenant’s sole occupancy (like their bedroom and/or personal ensuite) and a practical percentage of general living areas shared. These shared areas include areas such as garages and outdoor spaces. Put simply, if you live solely with one tenant, you’ll typically share 50% of shared living spaces.

However, if your tenant/s pay for parts of your regular costs, like internet or electricity, as a regular fixed cost or as a percentage of bills – this must be treated as rental income.

Before you become a live-in landlord…

It’s important to consider who you’re renting to, and whether the financial rewards outweigh the costs.

Friends with fewer benefits

Often, people are tempted to rent out rooms or spaces to their family or friends. This kind of agreement tends to be discounted below market rates for a similar space due to your familiarity. However, this does restrict some of the tax deductions you will be able to claim.

When renting out a room to a family member or friend, the ATO requires you to adjust your claims downward by the same proportion as the rental cost. This means if the market rate of your room rented by your friend is half the market rate, you’ll need to halve your tax deductions too.

Figuring out the market rate for your available room is pretty simple. Online, you can check out similar accommodation available within your area and their rental rate. From there, you can price your own room accordingly, in line with its competition. If you are not confident to do this, you can engage a real estate agent to recommend the rental rate in a letter. This will support your claims to the ATO.

Capital Gains Tax

Typically, when you sell your residential home, you are not liable for capital gains tax, sometimes referred to as CGT. However, as you have gained income from holding this asset through renting a portion out, you are no longer entitled to a full main residence exemption.

This means you will need to pay at least some capital gains tax on the sale of your home. The taxation rate will be adjusted depending on the floor area portion of the home rented and for how long. Factors impacting the capital gains tax rate will be:

  1. Total area of the home set aside for income (maybe 25%); and
  2. The duration of usage (days per year).

Become a live-in landlord can be a great opportunity to gain added income, offset living expenses, and supplement mortgage repayments, as well as the social benefits of living with new people. Yet as with all tax-impacting activities, it’s important to be informed when opting to rent out some space.

The team at Online Tax Return are ready to help you to maximise your next tax return. Whether you’re a new live-in landlord, considering becoming one, or have been one for years, our registered tax agents have the knowledge and experience to make it work for you.

Contact us today to reap the benefits!

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.