Airbnb has become increasingly popular among property investors in Australia as a way to generate additional income from their investment properties. However, understanding the tax implications and deductions associated with Airbnb income, including the importance of declaring it, can be confusing. The Australian Taxation Office (ATO) plays a crucial role in regulating the type of rental expenses that Airbnb hosts may be able to claim for their income tax deductions. In this article, we’ll break down the essential information you need to know about Airbnb tax deductions to help minimise your tax liability.
Airbnb Tax Deductions: Property Living Situation
Before we dive into the specifics of Airbnb tax deductions, it’s important to note that this guide is intended for general guidance and should not be considered financial advice. We recommend consulting a qualified accountant to assess your individual situation.
There are two scenarios that can affect your Airbnb tax deductions:
Renting out the entire home for Airbnb
Renting out a portion of the home for Airbnb
These scenarios lead to three categories of expenses and tax depreciation, which in turn affect how you can claim deductions:
Fully deductible expenses for the rented area
Apportioned expenses for shared areas
Non-deductible expenses for the host’s private area
Additionally, the ability to claim expenses varies based on whether you are renting out the entire home, only a part of it, or if your rental income exceeds certain thresholds.
Short Stay Accommodation vs Residential Rental Income for Airbnb Tax Deductions
While short stay accommodation like hotels and motels can claim tax depreciation at a rate of 4% for properties constructed after 27th February 1992, Airbnb is classified as a residential investment property. This means it qualifies for Division 43 Capital Works if construction began after 15th September 1987 or for underground capital improvements from 27th February 1992. Additionally, goods and services tax does not apply to residential Airbnb properties.
Division 40 Plant and Equipment, such as rangehoods, air conditioning units, and hot water systems, are eligible for depreciation if they’re purchased brand new or are part of a new renovation. However, due to the 2017 legislative changes, second-hand or previously used plant and equipment are not depreciable. Services tax is also not applicable to Airbnb properties, even if the income exceeds the GST threshold.
Airbnb Tax Deductions: Renting Out an Entire Home
If you don’t live in the property and the entire property is used for Airbnb rentals, you can claim depreciation on the entire premise, even if it’s unoccupied. You can also claim tax deductions for various expenses such as mortgage interest, property taxes, insurance, maintenance, and utilities. However, you must ensure that your property is available at market rate to avoid misusing deductions by renting to family and friends at discounted rates.
If you move back into the property, you cannot claim depreciation or any Airbnb tax deductions from the date you move in. Instead, you’ll need to calculate your deductions pro-rata for the period the property was available for rent.
Airbnb Tax Deductions: Renting Out a Portion of Your Home
When you only rent out a part of your home for Airbnb, the income generated is considered assessable income for tax purposes. You’ll need to apportion expenses based on the floor area used for private and rental purposes. Keep in mind that due to the 2017 legislative changes, Division 40 Plant and Equipment are not claimable unless they’re brand new and the property isn’t owner-occupied.
Depreciable Assets Claimable for Airbnb Tax Deductions
For Division 40 Plant and Equipment purchased specifically for Airbnb use, you can claim the entire tax deduction benefit for assets like:
Couches/sofas
Tables and chairs
Beds
Appliances
You can also claim expenses for the depreciable assets used for Airbnb.
However, shared assets like bathrooms and living rooms are only partly deductible and must be apportioned based on usage.
For Division 43 Capital Works, deductions are apportioned based on the floor space comparing rental area vs owner-occupied area.
Other Airbnb Tax Deductions
Depending on whether you rent out a portion or the entire property, you could potentially claim the following as Airbnb tax deductions to help reduce your overall income tax liability:
Cleaning costs for the rented spaces
Repairs and maintenance
Food and meal provisions for Airbnb guests
Airbnb service fees and commission
Listing and property management costs
The following expenses can be partially claimed as Airbnb tax deductions:
Interest on your loan
Council rates
Utilities and insurance costs
Capital Gains Tax and Airbnb Tax Deductions
If you’re using your principal place of residence to rent out rooms for Airbnb, you will not be completely exempt from the main residence capital gains exemption. The application of capital gains tax (CGT) to Airbnb properties means that even if you’re using a portion of your property to produce assessable rental income, you would only be eligible for a portion of the main residence CGT exemption. This means you’ll likely need to pay capital gains tax on a portion of any capital gain realised when you sell your main property.
To accurately calculate capital gains tax, keep accurate records to indicate clear starting and ending points. These are then factored in with:
Total floor space apportioned towards producing assessable rental income
Total time period of use for Airbnb rentals
Whether the property was first used to produce income after 20 August 1996
The ATO provides a Property Exemption Tool to help calculate CGT, or you can speak to your tax accountant.
Goods and Services Tax and Airbnb
Airbnb falls under residential taxation laws, and goods and services tax (GST) is not applicable, even if earnings exceed $75,000. Services tax is also not applicable to Airbnb properties. This also means you can’t claim GST credits for any expenses or costs related to the property.
State Government Laws on Short-Term Rental Limits
Pay attention to state-specific laws regarding the number of nights you can rent out your property for Airbnb. In NSW, this is limited to 180 nights a year, and all letting activity is still deemed residential for tax purposes.
The rise of the sharing economy has led to increased regulations on short-term rentals like Airbnb.
You can transition to long-term leases for the remainder of the year after exhausting the 180-day limit to still claim Airbnb tax deductions for the full year. Having the property actively available to rent is sufficient in claiming tax deductions for the entire year. If you move into the property as your main residence, you’ll need to apportion your tax deductions accordingly.
Key Takeaways
Every investor’s situation is different, and the circumstances of living in the property or completely renting it out affect how you can claim rental property depreciation.
Consult your accountant to discuss your tax matters and maximise your Airbnb tax deductions. Ensure you understand how to claim tax deductions for expenses related to your rental income, such as maintenance, utilities, and mortgage interest.
Tax depreciation on plant and equipment and capital works is the second-largest tax depreciation opportunity for investment properties after interest.
Before Using Your Property for Airbnb
Seek advice from your accountant and understand the full tax implications
Obtain a property valuation to estimate CGT impact
Keep records of all Airbnb rental activity and disclose your Airbnb income in your tax return
Engage a quantity surveyor for a tax depreciation schedule to maximise depreciation claims
At Thrifty Tax, our tax depreciation schedules provide both the prime cost and diminishing value depreciation schedules (compare them in our sample report). They’re designed for both investors and accountants to help determine what’s best for you.
Our ‘Thrifty Tax’ method focuses on being the most aggressive in depreciation claims, the fastest in turnaround time (within five business days), and the most affordable. To purchase your depreciation schedule, call us to get a free estimate on how much depreciation we can claim for you.