Whether you are a live-in landlord or interested in renting or leasing rooms in your home, this article is for you! We will cover some important tax basics for live-in landlords.
Live-in landlords are common these days, as more and more people lease out rooms in their home. It can help pay the mortgage, cover running expenses and fill up otherwise unused space. If you lease out part of your home, you’ll receive rent. This is usually treated as “assessable income” by the ATO.
That’s why it’s important to learn the basics about your live-in landlord tax obligations.
What changes at tax time?
When leasing or renting our your room(s), you’ll receive rent payment from your tenant. Rent is income and it must be declared in your tax return.
Next, you can claim deductions against this income to reduce your tax liability. Let’s see how to do that best:
As a landlord, you need to keep good records
Renting out one or more rooms in your house can be an effective way to earn additional income. Be sure you understand your tax responsibilities as a live-in landlord.
You’ll want to stay in the ATO’s good books. You also want a decent tax refund and avoid over-taxation. The absolute number-one habit that makes those things possible: establishing a steady, steady habit for keeping receipts and records. It doesn’t have to be complicated! Just keep receipts and a short note about any expenses or costs relating to renting your space — plus record any rent income you receive.
Your records folder will be particularly useful at tax time
Remember, no receipts means no tax deductions. So, keep them all. If you’re in doubt about whether a receipt is claimable, keep it anyway. Your tax agent can advise whether you can use it, later, to boost your tax refund or reduce the tax payable..
Claim your live-in landlord tax deductions: The Apportion Method
There are many tax deductions you will be able to claim as a live-in landlord by using the “apportion method” Sounds scary? Don’t worry, it is simple.
The apportion method is a common way of separating tax-deductible expenses between private and personal use. As a general approach to determining this, apportionment should be made on a floor area basis (the space in which your tenant takes sole occupancy) with a reasonable figure for access to other general living areas including the garage and outdoor areas. This means you’re including the tenants living area along with an appropriate estimation of other living areas you share together, which for someone residing with one other person would typically be 50% of the shared spaces.
If the tenant is also paying for part of your running costs (electricity, internet, heating etc) as either a fixed weekly/monthly amount or as a percentage of the bills, you’ll need to treat this the same as rental income. Ensure you claim both the income and the deduction for these expenses.
One live-in landlord’s tax: An example
Claire owns a two bedroom unit. She rents out one bedroom for $150 per week to a student, all year-round. The rented bedroom floor area is ten square metres – and that’s twenty per cent of Claire’s unit’s total floor area.
Claire’s expenses include mortgage interest, building insurance, rates and taxes, totalling $20,000 for the year.
So what should she enter on her tax return?
- Income: Claire should enter $7,800 rental income ($150 rent x 52 weeks)
- Deductions: Claire should enter $4000 (20% of her $20,000 expenses) as tax deductible expenses. She should send copies of the receipts to her tax agent; that’ll help them ensure it is all claimed correctly and if the ATO has problems, the tax agent should help sort it out.
What kind of tax deductions can live-in landlords claim?
When claiming deductions, remember to keep all your receipts. Set aside the time to work out what percentage of your expenses are claimable throughout the year. This will ensure that when tax time comes around, it’ll be easy to lodge.
Some common deductions include:
- Internet and phone costs
- Water, power and council rates
- Upkeep and repairs
- Depreciation on furnishings and equipment
- Interest on your mortgage
- Body corporate fees (when applicable)
What if I’m renting out a room to family or friends?
Sometimes, it’s tempting to rent to friends or family at a discounted rate or less than market rate. However, from the ATO’s perspective, that may limit the deductions you can claim.
When you claim property-related tax deductions, the ATO assumes you should make the most of your property’s investment potential. If you intentionally receive less than market rent, the ATO limits your deductions to a maximum equal to the income received.
How do I find the market rate for renting a room?
Pretty easy, really. First, look on realestate.com.au. Check out comparable properties in your area, and be fair and honest with yourself about it. (Remember, the ATO can search just as easily, and compare to your house. The internet keeps you honest, so be honest and avoid trouble! Another approach is to ask your real estate agent to recommend your market rent in a short letter. Provide that to your tax agent and you should be set for whatever the ATO throws at you about market rents.
Working out your live-in landlord tax deductions when renting to family or friends can be tricky. Make sure you ask your tax agent (like Etax) for help if you’re not sure. It’s always better to get this section right in the first place, rather than face ATO troubles down the track.
Will I have capital gain tax implications?
When you selling a house that was your own principle place of residence, you are not usually liable for capital gains tax (CGT). However as soon as you start renting space, it does get more complicated.
