Property Rental Income and Deductions (e.g. Airbnb)
All rents received will need to be included in the tax return as assessable income, regardless of whether the entire property is rented, or just one room. The running and holding costs can be claimed as deductions to reduce the income. If the entire property is rented, all of the running costs can be claimed during the period that the property is rented. If a granny-flat is rented, the costs associated with the granny-flat will be deductible. If only one room is rented, only the costs associated with that part of the house can be claimed as a deduction. This is usually calculated using the area that is solely used by the renter and reasonably apportioned between any common/shared areas. This should be calculated with your tax specialist to ensure that the deductions are appropriate.
The depreciation rules for furniture and fittings are much more restrictive for a second-hand residential property and would generally be excluded. The original building costs may be amortised as a capital works expense, depending on the age of the property, and any renovations that have been undertaken. If the rental activity is sufficient to be considered a small business activity, you may be able to access accelerated depreciation rules.
GST for a residential property is usually input-taxed (No GST). If you provide regular hotel services, such as a concierge, booking service or laundry services then it may be considered a hotel and be a GST taxable supply.
The capital gain calculations on a property can be complicated at the best of times. There are various factors that need to be considered:
- Was the property used as a main residence?
- How long was the owner absent from the property?
- Is the owner a tax resident of Australia?
- What is the size of the property?
- Has the property been used to carry on a business?
If a property is an individual’s principal place of residence from the date of purchase, it is eligible to be exempt from capital gains tax under the ‘main residence exemption’. A property is able to retain the main residence exemption for a period of up to 6 years under the absence rule, if the owner completely moves out of the property.
If the owner has not completely moved out of the property before the property is rented, the capital gain will no longer be 100% exempt from capital gains tax. A capital gain exemption can be apportioned based on the time that the property was available for rent over the life of asset. A real estate valuation should be obtained, at the same time that the property first begins to earn income. Any increase in property value between the purchase date and when it was first rented will remain CGT exempt. Any assessable capital gain will be eligible for a 50% discount if the property has been held for over 12 months. There are overlapping capital gain rules that need to be considered to determine the best outcome for each individual.
Renting out a Car Parking Space
If you are receiving rental income on a car parking space, the rental receipts must be included in your tax return as assessable income. Any deductions that are associated with the car parking space can be claimed to reduce the income.
The rent received on a car parking space is a GST taxable supply. If the annual car park rental income is projected to exceed $75,000, you will need to register for GST and include GST on the invoice. If the owner is already GST registered, GST must be included on the invoice.
The property is able to retain the main residence exemption for up to six years under the absence rule if the owner completely moves out before the car space is rented. If the owner has not moved out of the property, they will no longer be able to access the full main residence capital gain exemption. The capital gain can be apportioned based on the amount of time that the car parking space was available for rent and the area of the parking space. A market value should be obtained on the date that the car park is first available for rent. Any increase in property value from the purchase date until the car space is first rented will remain exempt from capital gains tax. If the car park is free-standing and has been used for income-generating purposes, we may be able to access the small business capital gain concessions to significantly reduce any tax liability. This should be discussed with your tax professional.
The above summary should be considered a general guide only. You should seek tailored expert guidance to ensure that the tax issues are considered for your personal circumstances. Feel free to contact our office at Hoffman Kelly for a consultation.