It can be, but before you place that ad you need to be aware of any possible tax obligations further down the track. Check out this article to discover what you need to know…
A homeowner's guide to letting on Airbnb
Melissa Browne, The Sydney Morning Herald
29 August 2017
More and more homeowners are looking for ways to increase their household income. This includes looking to their family home to provide extra funds through Airbnb or renting out the granny flat in the backyard.
While this might seem like a short-term win that may include the ability to claim a percentage of your mortgage as a tax deduction, it's important to remember the long-term cost when you sell.
Too many people aren't aware that they may lose their main residence exemption if they use their house for income-producing purposes, which means they'll potentially pay capital gains tax (CGT) when they sell their home.
If you're thinking to yourself, 'I'm only renting my spare room out every other weekend on Airbnb, the Tax Office will never find out. Besides, if I don't declare the income and claim the deduction then I don't need to worry about CGT' – I urge you to think again.
That's because the Tax Office can data match your information on sites such as Airbnb to ensure that you're declaring income.
The ATO's assistant commissioner Matthew Bambrick has said that information is used from "a range of third-party sources" such as banks, eBay and Uber, to data match with what is being declared on tax returns and to catch undeclared income.
"The data enables us to put together a picture of what a person's assessable income should be. If something doesn't look quite right, it will send up a red flag and we'll investigate further," he said.
"The ATO is keeping up with the sharing economy, meaning that we have the ability to identify if you have left out a significant amount of your income."
Does this mean that you shouldn't be renting out the granny flat or making a few extra bucks on Airbnb? Generally, no however it's important to understand the long-term financial implications of the short-term gains you're currently making.
Let's take the case of renting a granny flat on Airbnb. If you decide to rent the granny flat on Airbnb, it's available to rent every week and it's available for market rent then you may be entitled to claim a percentage of your interest, council rates and more against the income derived which means part of your ownership costs may be tax deductible. Which can be a great thing. This may mean that the income and expenses cancel each other out and you end up paying no income tax on the net income. Let's assume in this example that the granny flat represents 7.5 per cent of the house.
When you eventually sell your house, let's say you make a profit of $300,000. Normally you'd pay no tax on this as you'd be entitled to the main residence exemption. However, as the property was income producing for half that time then $150,000 is potentially now subject to CGT. The good news is you are potentially entitled to a 50 per cent discount, which reduces the profit to $75,000 of which 7.5 per cent is now declarable for CGT purposes or $5625. If your taxable income is an average one, the tax payable would be $1771.88.
Now that might not seem like a lot of money; however, if you live in a suburb where house prices have skyrocketed, your profit could be much more than the example above, which means that the CGT payable is also much more.
With the average Australian income for Airbnb hosts at $4500 a year, in the example above, even with deducting the CGT payable, the host would be better off.
However, with some suburbs, particularly in Sydney, having increased dramatically, there is a chance the CGT will be more than the income received, which may mean you want to reconsider your options.
You may argue that you have no intention of moving and therefore any potential CGT is irrelevant because you only pay tax on the profit when you sell. However, circumstances change for all of us and it is important to be aware of any potential gain should you choose to sell.
What is important is not to bury your head in the sand and claim that you didn't know. That's simply not a good enough excuse and the Tax Office will issue fines and penalties if you're not declaring both the income and the CGT.
Airbnb and granny flats can be a fantastic way to make some extra money from what is often our biggest and most expensive asset, however it is important to be aware of both your tax obligations both in the short term and the long term.
Got a Granny Flat ?
Perhaps Airbnb might be a good alternative rather than a standard residential lease arrangement (subject to any council requirements of course !)
Don’t’ have a Granny Flat yet – when you look at some of the returns home owners and investors alike are achieving, it makes it worthwhile investigating.
Then talk to your financial advisor or accountant to see what the tax implications might be for your own personal circumstances …
Give Sonia a call today on 0403 309 136