While interest rates have spiked in recent years and are only steadily decreasing, many young homeowners are feeling the crunch. While having a friend move in and rent a room may seem attractive to cover the mortgage and other household costs, it is important to know the tax consequences of using part of your home as a rental property.

Rental Income

The rent you collect from renting a room in your home needs to be reported as rental income. You can claim expenses against the rental income, but this will involve apportioning property expenses for the apportion of your home used to generate rental income (ie floor space available for your roommate for interest & council rates, electricity and water use apportionment etc). An important factor to keep in mind is also market value rates and claiming rental losses. To be able to record a rental loss from this arrangement, you need to ensure that the rent you are charging your roommate is equal to or above market value, otherwise you will need to report nil net rental income on your tax return.

Capital Gains

By having a roommate and charging rent, a portion of your main residence will now become liable for CGT when you decide to sell the property. This is due to part of your home now being considered an income producing asset. This apportionment will be based on area (ie area roommate occupies within the house vs total property size) and time (ie how long you have a roommate vs how long you own the property as a main residence).

It is important to weigh up all the above factors before entering a rental arrangement for your main residence. Whilst the ability to negatively gear your main residence and cover housing costs may seem attractive, please keep in mind that any gain on value of your main residence is now liable for capital gains tax.

If you need assistance in navigating the tax benefits and pitfalls of similar arrangements to the above, please contact WSC Group on 1300 365 125 or [email protected] to request an initial consultation.