August 13, 2021

Rental Income and Tax

Income from a rental property is generally assessable, meaning that it counts as your income for tax purposes. Likewise, common expenses such as repairs and maintenance can be deducted from the profit at the end of the financial year.

However, be warned that if you rent out part of your home – even a single room – rather than renting it in its entirety, you may not be entitled to the full main residence exemption from capital gains tax (CGT). This means you will be required to pay CGT on part of any capital gain made when you sell your house.

What is the CGT main residence exemption?

Under the main residence exemption, you can exempt the capital gain made on a home (or part of a home) from CGT if:

(a) it is your main residence; and

(b) you use it mainly for private purposes.

Some people may be expecting to avoid paying CGT when they sell their home (under the main residence exemption). However, if you have used any proportion of your dwelling to produce income – for example, renting out part or all of it – you are generally not entitled to the full CGT exemption.

If you rent out part of your home instead of renting it all, then you can only get a partial tax exemption. The percentage is based on the size that the rented part is in relation to the total size. For example, if you own a two-bedroom house but rent out just one bedroom, 50% of any gain made from selling it would be subject to CGT.

  • To figure out the tax on your capital gain, you need to consider a number of factors, including:
  • The proportion of your floor space that is dedicated to generating income
  • The period of time you have used it for that purpose
  • Whether you’re eligible for the “absence rule” where you still treat a house as your main residence when you move out (ask us for more information if this is the case), and
  • If you use your dwelling to produce income after 20 August 1996, there is a possibility that the market value of your dwelling will change when it’s time for CGT purposes.

If you want help determining how much of your capital gain is free from CGT, get in touch with us today.

Income and expenses

If you rent out part of your home, including a single room, instead of renting the entire house, you may not be entitled to the full main residence exemption from capital gains tax (CGT). This means that when you sell your property and make a capital gain on your sale, some of that capital gain is taxable.

Deductions the ATO allow for are usually limited to expenses related to rental income. As a general guide when you are renting out a house, divide the expenses by the area that the tenant will be using. Then add in a figure for access to other parts of the house. The main residence exemption can be complicated if there are more than one tenant occupying your property. Keeping accurate records is important to ensure the correct amount of tax is paid.

Goods and services tax (GST) does not usually apply to residential rent, so you won’t owe GST on the money your tenants pay you. However, if you use space in your home for commercial purposes, such as renting out a spare bedroom to tourists, then GST will apply.

If you rent out any of your home at less than normal commercial rates, the ATO might not allow you to claim as many deductions. The amount of deductions is capped at the amount of rental income that you get.

It’s also important to note that payments for lodging from a family member cannot be considered as rental income. Consequently, you can’t claim income tax deductions.

Home ownership is rewarding and can offer a sense of stability and security. However, there are some tax implications that you’ll need to consider when renting out part or all of your home in Australia. If this sounds like something you’re interested in doing, get in touch with our qualified professionals who can help you navigate the process while ensuring that you pay the right amount of taxes on capital gains from property sales.

Filed Under: Small Business Tax, Tax

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