*Updated May 2024
We’ve heard about renting to family and friends and renting out your home to the government but what about renting out a room in your home to a tenant? Keeping a housemate has many advantages, like sharing your bills and other expenses.
Additionally, it is a great way to earn passive income from a spare room.
Most people imagine landlords and renters living apart, but what if you rent a space in your home? Do you need to live in your home for a year before renting it out? These are some of the questions we’ll answer.
When you rent out a room in your home, you automatically become a landlord without having a suitable investment property. Australian Taxation Office’s terms such rent as assessable income.
If you’re thinking of renting a room in your house, this article is a good read. We will discuss all the important things you need to know before renting out a room.
Finding a tenant
Since you are renting out a room in your house, search for a housemate who is a friend. It will be the safest option. You can advertise online if you do not have a friend or extended family member.
Also, a great way to find roommates will be advertising on socials such as Instagram or Facebook. Along with that, many websites connect renters to landlords. We will advise you to always look in a trusted network for renters.
Tax Implications
When you rent a room and still live in the house, you will not be entitled to the residence exemption from capital gains tax. So, you should consider whether the additional income will put you at a higher tax rate.
As a landlord, you can take the tax deductions as rental income. This condition is sustainable if you divide specific tax deductions between your home’s rented component and the part you reside in.
You can also deduct mortgage repayments, utilities, and home insurance cover. Along with that, home repairs and improvements can also get deducted from the rental income. Consult with a certified tax agent for tax advice.
Also, When you rent out a room in your house, the rental income is considered taxable. Here are some key points to remember:
- Assessable Income: Rental income is considered assessable by the Australian Taxation Office (ATO).
- Tax Deductions: You can claim deductions for a portion of your mortgage interest, utilities, and home insurance. Ensure you divide these expenses between the rented and non-rented parts of your home.
- Capital Gains Tax (CGT): Renting out part of your home might impact your eligibility for the full main residence exemption from CGT.
Check your insurance policy again
Before renting out a room, review your home insurance policy to ensure it covers having a tenant:
- Landlord Insurance: Regular home insurance may not cover damage caused by tenants. Consider landlord insurance for added protection.
- Short-Term Rentals: If you plan to use platforms like Airbnb, check if your policy covers short-term rentals or if you need additional coverage.
Check your current policies for the coverage of tenants in your home. Give your insurance agent a call if there are any issues.
In general, ordinary home insurance does not cover the person renting your room or any other person who is not a household member.
You may be considered a landlord if you make taxable gains from renting out a portion of your home. Suppose you intend to establish or share an apartment on Airbnb, you may be required to purchase a property or contents policy for a short-term rental under specific conditions.
Rental agreements and house rules
We recommend that you have a written contract between renters and landlords outlining boundaries and expectations. You can add a strict rental schedule to the contract.
A clear, written rental agreement is essential to avoid misunderstandings. Here’s what to include:
Rent Details
- Rent Amount: Clearly state the rent amount and the due date for payments.
- Payment Method: Specify how rent should be paid (e.g., bank transfer, cash).
House Rules
- Common Areas: Define the use of common areas like the kitchen, living room, and bathroom.
- Visitors: Outline any restrictions or policies regarding guests.
- Pets: State whether pets are allowed and any conditions related to pet ownership.
- Noise Levels: Include rules about noise to ensure a peaceful living environment.
Responsibilities
- Cleaning: Specify who is responsible for cleaning common areas and the rented room.
- Maintenance: Detail responsibilities for maintenance and repairs.
- Utilities: Explain how utility bills will be split and paid.
Bond and Security
Requiring a bond can provide financial security for potential damages or unpaid rent. Here’s how to handle it:
- Bond Collection: Collect a bond amount up to four weeks’ rent.
- Bond Lodgement: Lodge the bond with the RTA within the required timeframe.
- Bond Refund: Outline the conditions for the bond refund at the end of the tenancy.
Also, the earlier you discuss responsibilities and boundaries, the better. The house rules can include visitors, pets policy, common areas, and parking.
You may also claim for damage caused by renting, maintenance costs, and other issues you want your renters to understand. You may also discuss having a tenant sign an agreement. Additionally, make sure your tenant is comfortable asking for clarification before signing anything.
Some consider buying a duplex and renting half, that way, you can have a little more privacy from your roommates.
Legal responsibilities
When renting out a room in your home, understanding your legal responsibilities is crucial. Here are the key legal aspects to consider:
Residential Tenancy Authority (RTA) Bond
- Bond Registration: If you require a bond from your tenant, it must be lodged with the Residential Tenancy Authority (RTA). This provides security for both parties in case of disputes.
- Bond Amount: Typically, the bond should not exceed four weeks’ rent.
Compliance with Tax Laws
- Declare Rental Income: All rental income must be declared on your tax return. The Australian Taxation Office (ATO) considers this income assessable.
- Record Keeping: Maintain accurate records of all income and expenses related to the rental. This includes receipts for repairs, maintenance, and utilities.
Tenancy Laws
- Rental Agreements: A written rental agreement is essential. This should outline the terms of the tenancy, rent amount, payment schedule, and house rules.
- Notice Periods: Be aware of the required notice periods for ending a tenancy or for the tenant to vacate.
We don’t want you to be worried when you want to pay a tax bill during tax time because you failed to disclose the details of your rent income stream. There are numerous tax deductions to consider.
So before finalising the agreement, examine the Australian Tax Office recommendations. Also, we will recommend you consult your accountant or lawyer.
Keep detailed records of all transactions
Living in a shared property, it can be tough to keep track of late utility payments. Keeping a record is a good idea if there is a disagreement about who paid or received the money. Ensure you save a history of utility bills.
- Utility Bills: Keep track of who pays what to avoid disputes.
- Rental Payments: Document all rental payments and any expenses related to the rented room.
- Receipts and Invoices: Save all receipts and invoices for repairs and maintenance.
Tips for Renting Out a Room
Here are some practical tips to help you successfully rent out a room in your home:
- Screen Tenants Carefully: Conduct background checks and reference checks to find reliable tenants.
- Set Clear Expectations: Discuss house rules and responsibilities upfront to avoid misunderstandings.
- Maintain Open Communication: Foster good communication with your tenant to address any issues promptly.
- Keep Detailed Records: Document all transactions, agreements, and communications to protect yourself legally and financially.
Conclusion
Renting out a room in your home can be a great way to earn extra income and share expenses.
By understanding your legal responsibilities, setting up a clear rental agreement, and ensuring proper insurance coverage, you can create a positive and profitable renting experience. Keep these tips and guidelines in mind to navigate the process smoothly.
FAQ: Renting Out a Room in Your Home in Australia
How do I rent out a room in Australia?
To rent out a room in Australia, you should use a written rental agreement, specifically Form R18, which includes details like the specific room to be occupied, accessible common areas, the lease term, and house rules.
What documents are required for renting in Australia?
When renting in Australia, necessary documents include two forms of photo ID, such as a passport and driver’s license, and references from an employer and past landlord if applicable.
Can I rent out my first home in Australia?
Yes, you can rent out your first home in Australia and potentially treat it as your main residence for capital gains tax purposes for up to six years after moving out, provided you consult with a tax adviser regarding the implications.
What is the median room rent in Australia?
As of March 2024, the median rent for a room in Australian capital cities is typically around $620 per week.
