So, you have a spare room and could use some extra cash… aha Airbnb you’re thinking. Not a bad idea really because as well as the side hustle cash benefits, Airbnb can be a great way to meet new people.
But before you sign up, don’t forget about what this little bit of income on the side means for tax.
Before signing up, you should understand the money you earn needs to be declared as income in your tax return. But wait, I hear you say… “the Tax Office will never know!”
Well truth is The Tax Office data match from lots of sources, so I wouldn’t try to hide it. Additionally, the Tax Office tend to come down hard on people who are trying to rort the system and taking the risk wouldn’t be worth the penalty if you’re audited and caught.
Another thing I might hear you say is… “I can claim lots of extra deductions”. Well, this is true… to an extent. You just can’t claim all the expenses, only the portion which relate to hosting guests. You will be able to claim percentage amounts of:
- Interest on your mortgage;
- Insurance;
- Water and rates;
- Electricity and gas;
- Repairs;
- Depreciation on furniture and equipment (where >$300);
- Cost of furniture or equipment (where <$300).
- Food costs for your tenants.
The amount you are able to claim will depend on the size of the room being rented in proportion to the rest of your house and how often you had it available for rent.
Potentially this can make for great savings to be had every year. But like most situations, there’s another element to consider and that’s Capital Gains Tax (CGT)
People often don’t think about CGT before embarking on an Airbnb adventure and this oversight can lead to unwelcome surprises down the track. Capital gains tax is generally not payable on your home (it’s called the principal place of residence exemption)… but, if you start earning income on your home, it loses its exemption, even if you are only renting out part of the home. That’s right – the one Airbnb room counts.
CGT will only be payable in proportion to the room being rented and the time for which it was available. Depending on how long this is, how long you have owned your home and what has been happening with property prices, it could be a little or a lot. It’s something that you have to consider before you start collecting Airbnb income – it’s too late once you’ve started.
Make sure you keep good records along the way. The ATO myDeductions app is a great free tool to help you keep track of all your income and expenses and there’s a version available for all smart devices. The app allows you to easily record information on the go and take a picture of your receipts so that they don’t get lost. https://www.ato.gov.au/General/Online-services/ATO-app/myDeductions/
By keeping track as you go, you can see how much you’re making, whether it’s worthwhile for all the effort and most importantly, what your tax liability might be at the end of the financial year.
There are other issues to consider too, most importantly your legal obligations. Are you renting – is subletting allowed? Does your strata rules allow subletting? Will your insurance continue to be valid if you have strangers in the home? All these are questions you should answer with the assistance of a qualified professional. Don’t assume it will all be alright!
In summary:
- Before you decide to rent a room or two through Airbnb, talk to your tax adviser about the capital gains tax implications. It may not be worthwhile from a financial point of view once you’ve crunched all the figures.
- Maintain good records including every receipt for each expense you intend to claim.
- Keep some of the income aside. If your income is more than the expenses you have incurred, you are going to pay tax on the difference. You don’t want to get to tax time and have a nasty surprise.
- Speak to a professional about the legal side of letting your property.
Do you have further questions about how Airbnb could work for you? I’m more than happy to chat with you and offer a FREE 30 minute initial consultation. You can easily book online here and I look forward to helping you sort your finances!