Airbnb is a hero of the sharing economy. By matching property owners with potential guests, it’s an alternative accommodation renaissance. As a landlord, you set the price and conditions while guests get a personal touch and insight into the area.
With all the recent chatter about the sharing economy, tax professionals have been coming to terms with how Airbnb transactions are taxed. Although you’re generating income from Airbnb, you’re not running a business.
RENTAL INCOME AND YOUR TAX RETURN
The income that you get from your Airbnb rent will normally be deemed assessable, given that the property is advertised to the public online. The ATO may attempt to argue you’re not charging a commercial rent, particularly if you’re making a loss on your Airbnb venture.
YOU ARE ENTITLED TO CLAIM TAX DEDUCTIONS
You can claim tax deductions for all expenses which are incurred in deriving your rental income. Typically, where the entire property is rented out, all of the costs involved in running the property will be deductible. Where you rent out part of the property you’re living in, some degree of apportionment is needed. If you’re a landlord for a rental property with assessable income, you may be entitled to tax deductions for expenses incurred. These expenses fall into three categories:
- Expenses directly associated with the rented area can be deducted in full
- Expenses related to shared areas need to be apportioned
- Expenses related to the host’s private area only cannot be deducted
Expenses that may be deductible in full include:
- Depreciation of furniture used in the rented room
- Commercial cleaning of the rented area
- Repairs and maintenance
- Food, such as breakfast provisions, made available to the guest
- Professional photography for the listing
- Service fees and commissions charged by Airbnb
EXPENSES RELATING TO THE ENTIRE PROPERTY
Where there are expenses that relate to the entire property, you’ll need to apportion them between the rented area and the area you use privately. This is most often done based on the floor area used for renting compared to the total floor area of the property.
Some examples of expenses that relate to the entire property that may be apportioned include:
- Mortgage interest or rent
- Council rates
- Utilities
- Insurance
EXPENSES RELATING TO SHARED AREAS
Expenses that relate to shared areas can be apportioned based on access. So, if the renter and the landlord both have equal access to, say, the lounge and the kitchen, you can deduct 50% of these expenses.
Examples of expenses that relate to shared areas only include:
- Depreciation on furniture and appliances located in shared areas (such as sofas, TV’s, kitchen equipment)
- Internet, phone and cable TV costs
WHEN RENTAL EXPENSES EXCEED RENTAL INCOME
If rental expenses exceed rental income, you’ll make a loss. The excess of rental expenses over rental income (the loss) can effectively be claimed against your other income such as salary. Care is required if that is the case. As noted above, the ATO may seek to argue that you are charging a non-commercial rate of rent (i.e. a rate lower than market rate). If successful, they could limit the rental deductions to the extent that they exceed the amount of rental income received.
Where you rent out a whole property, expenses are only deductible where an area of the house is either actually rented out, or available for rent.
For example, where a property is available for rent for 180 days a year then only the portion of rental expenses that were incurred over that 180-day period are deductible.
Note, it is not a requirement that the property is actually rented for the (in our example) 180 day period for rental expense deductions to be claimed. The property simply needs to be available for rent. Therefore, even if no guests stayed on the property during the 180 day vacancy period, if the property is advertised on Airbnb as vacant and available for rent, you can still claim deductions for the 180 day period.
Where you rent out only part of the property (such as a bedroom with access to shared areas in the property where you live), you can only claim expenses for the period the room is actually rented. So, if you only rented the room for two weeks in a year, you can only claim the proportion of expenses for the rented part of the property which related to that two week period. This is to stop you claiming deductions for periods where the room might be used for private or domestic purposes, even though it was notionally available for rent.
DON’T FORGET ABOUT CAPITAL GAINS TAX (CGT)
In most cases, when you sell your private residence, the sale is free of capital gains tax. However, if you have used part of the property for income earning activities – like renting it out through Airbnb – part of the gain will be taxable. This might mean that you have to do a tricky calculation on sale to work out how much of the gain is taxable and how much is covered by the main residence exemption.
This is an area that catches out many Airbnb hosts, many of whom are completely unaware of the CGT implications of renting out part of their home. Given the potentially long time lag between starting to rent out the property and ultimately selling it, CGT can be a costly trap for those who haven’t factored it into their cost/benefit analysis when they first decided to make part of the property available for rent.
Typically, the floor area calculation used in working out your deductible expenses will also be used here. Starting from the date on which the property was first used to generate income, a proportion of the gain based on the floor area which was available for rent will be chargeable to tax. This gain will also usually qualify for the 50% Capital Gains Tax discount.
DO I NEED TO REGISTER FOR AND PAY GOODS AND SERVICES TAX (GST)?
Almost certainly not. Good and services tax (GST) doesn’t apply to residential rents, so you’re not liable for GST on the rent you charge, and can’t claim GST credits for associated costs. This is the case even if your turnover exceeds the GST threshold of $75,000.
How can we help?
If you have any questions or would like further information or you are seeking property tax advice, please feel free to contact our office via email –info@investplusaccounting.com.au or phone 02 9299 7000 to either speak with someone or arrange a time for a meeting so we can discuss your requirements in more detail. You can arrange a free 15 minute no obligation chat to discuss your options. Please arrange an appointment with our office by clicking here
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