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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.
If you run your Airbnb in a small way – we’re talking to you. What we mean by small is that you’re letting out one or two spare rooms in your own private residence. Although you’re generating income from Airbnb, you’re not running a business. This means the complex rules around business taxation aren’t relevant to you.
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 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.
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;
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
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.
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.
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.
Let’s look at an ATO supplied example:
Sue owns a house with two furnished bedrooms. She advertises the rooms separately on Airbnb to guests who pay to rent the rooms on a nightly or weekly basis. Sue provides linen only. Renting out a room in your house is an input taxed supply of residential rent. Sue isn’t required to charge GST, but similarly won’t be able to claim GST included in expenses she incurs in renting out the rooms.
At year’s end, Sue includes all the rental income in her tax return and claims a deduction for the fees charged by Airbnb. She also claims for a proportion of her mortgage, electricity and other renting expenses. If Sue sells the home, she’ll have capital gains to account for as the home has been used partially for rental income purposes.
The ATO has its eyes on those using Airbnb to make a few extra dollars. To stay above board, keep proper records of all income earned and allowable deductions for which you’re claiming. This includes details of how you’ve apportioned expenses which are partially for private use.
Get advice from your accountant before becoming an Airbnb host. Make sure you are fully across all the potential tax impacts of renting your property before you list it.
Get a market valuation of the property at the date you start renting it out. This can be essential for CGT purposes, particularly where the house you are renting out is also the one you live in.
Disclose all you Airbnb income in your tax return and make sure you claim all the deductions you are entitled to.
Consider getting a quantity surveyors report to maximise your depreciation deductions.
Keep records of all your income and expenses. The ATO may ask to see them, particularly if they query an expense.
To find out more about how to record your Airbnb income and make the most of your potential deductions, talk to one our tax consultants.
Use our office locator and find your nearest H&R Block office or call 13 23 25.
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