Rental Properties, focus point's don't miss out
Thinking about renting out your personal or holiday home using Airbnb or a holiday agent?
In May 2015, the ATO released official guidelines informing Airbnb hosts of their obligations to disclose any money they make from using the service. Whether you’re renting out a property through traditional avenues or through the sharing economy the message is the same: keep good records, declare all your rental income and make sure you have evidence for any claims you make. Keep these records for five years from 31 October or, if you lodge later, for five years from the date your tax return is lodged.
So you have decided to do it. It is a great way to earn some additional funds but you must be aware of the tax considerations, rental income & expenses, and the impact on capital gains tax when you sell your house.
Rental Income – Do you need to declare?
All rental income earnt must be declared in your tax return
Rental Expenses - What can you claim?
Deductions can be claimed for expenses incurred in earning the rental income. Whether you’re renting through an agent or online, on a permanent or holiday rental basis the deductions are the same provided there is a nexus with the rental income earnt. Expenses that are directly related to the property being rented are deductible (if you are only renting a part of the property, you will need to pro-rata). Any private related expenses are not deductible. Additional expenses you may incur for holiday rentals that are deductible would be cleaning, professional photography for your listing, guest consumables such as milk and bread for when the guest arrives. Please refer to the ATO’s rental property guide for a full list of deductible expenses. https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Investments,-including-rental-properties/Rental-property-expenses/
Capital Gains Tax – Am I liable & how can I reduce it?
Broadly, the sale of your primary residence is CGT-free under the main residence exemption if:
1. the dwelling was your main residence for the entire time you owned it; and
2. it was not used to produce assessable income.
However, if you rent out a portion of your home on Airbnb, you are using a portion of it to produce assessable rental income; therefore, you would only be only eligible for a partial main residence exemption. This means you may be taxed on a portion of any capital gain realized upon the sale of your main residence.
To reduce your capital gains tax bill you need to keeping valid and accurate records from the time you purchased the property as this can pay off when it comes to selling the property and calculating CGT. The cost base of the property can be increased by including expenses, such as interest, rates and taxes. Capital gains are calculated by subtracting (from the property’s sale price) the cost base plus certain eligible expenses that were incurred as a consequence of owning the property. If the property is owned for at least 12 months, then 50% of the capital gain is added to the owner’s taxable income for the year in which they sell the second property. This is taxed at the owner’s marginal tax rate.
Do I really have to declare it? What is the risk?
The Australian Taxation Office is stepping up its focus on people who rent out their holiday homes for just a few weeks per year but try to claim excessive deductions.
Rental expenses need to be apportioned if your holiday home is only rented out a period time during the year or used by you, your friends or your relatives free of charge for part of the year; you are not entitled to a deduction for costs incurred during those periods.
It is also important that you have a clear intention to rent the property. If you made no attempt to advertise the property, or you set the rent so high it is unlikely a tenant could be found the ATO would find that you had no intention of renting your property and your rental claims would not be allowed.
What are the common mistakes taxpayers are making?
The following is a list of some common mistakes taxpayers are making, causing issues with the ATO and stress for the taxpayer:
- Private use: Claiming deductions for any expenses relating to your private use of the property
- Not available for rent: Claiming deductions for a property that is not genuinely available for rent.
- Construction costs: Claiming the purchase cost of the land component as part of the cost of constructing the rental property
- Initial repairs and capital improvements. Claiming construction costs as a decline in value of depreciating assets deduction instead of a capital works deduction. Capital improvements (such as remodelling a bathroom or adding a pergola) should also be claimed as capital works deductions. A common mistake is to claim initial repairs or capital improvements as immediate deductions.
- Interest expenses: You cannot claim a deduction for interest on the private portion of the loan.
- Legal expenses: You should not claim a deduction for conveyancing costs (this forms part of your cost base)
- Travel expenses: You cannot claim a deduction for the cost of travel when the main purpose of the trip is to have a holiday and the inspection of the property is incidental to that.
- Deductible borrowing expenses” The correct way to claim borrowing expenses of more than $100 is to spread the deduction over five years, or over the term of the loan, whichever is less. A common mistake is to claim all deductible borrowing expenses in the first year they are incurred.
Renting our your personal or holiday home on a short term basis can provide some significant financial benefits however it is important to ensure you satisfy the requirements from a tax perspective as this has become a focus point of the ATO. Just like the data sharing with Ebay, it will only be a matter of time before the ATO has access to such records of rental income. If you have any further questions? Please contact SMART Business Solutions on 0359 11 7000 or firstname.lastname@example.org
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