A large number of Australians who rent out a room in their home, whether it be via Airbnb or another avenue, are unaware that the practice can incur capital gains tax (CGT).
Many assume CGT is not on the cards because profit made from the family home (or ‘primary residence’) is usually tax-free. However, those who earn an income from a portion of the family home may inadvertently create a capital gain for the ATO to grab.
Even though CGT is affected by events throughout a vendor’s ownership period, it is often calculated many years down the track, and unfortunately, many may not remember or be able to locate records for a relatively short time in which they were renting part of the house out.
Some people are aware that renting out a portion of their home may trigger a capital gain event, but still fail to calculate the percentage of the property the calculated gain should be attributed to.
Vendors need to work out the portion of the property that was used for ‘investment’ or ‘income producing’ purposes based on the floor area rented out as a percentage of the total property. This needs to then be apportioned to the period that space was made available to rent throughout the duration of ownership.
For example, a couple who bought their property for $1.5 million back in 2006, sell it for $3 million in 2016. During their ownership, they rented out a bedroom and bathroom for four years and worked out that the rented space is equivalent to 15 per cent of the property.
15 per cent of their capital gain ($1.5 million) is subject to CGT, which comes to $225,000. Their next step is to calculate the proportion of time the part of the property was rented out. Since the area of the property was rented out during four of the ten years of ownership, they need to work out four-tenths of $225,000, which is $90,000.
Since they owned the property for more than a year, the CGT discount of 50 per cent applies, making the assessable net gain $45,000.
How much the actual tax works out to be depends on whose name the property is taxed in. For CGT purposes, and if the property is positively geared from an income tax perspective, it is better to put the property in the lower income earner’s name.
If the property was negatively geared, the couple would need to consider the tax benefit they would sacrifice. Negatively geared properties result in a larger tax deduction if claimed in a higher income earner’s name.