Renting out Rooms

hobo-jo · 6th May, 2007

I am reading one of Jan Somers books at the moment (More wealth from residential property) and came across an interesting paragraph or two about advantages of having boarders and whether you should declare their rent as income. She said that more often than not you would be better claiming at as income as you can then claim back many things around the home on tax. I would be interested to hear if anyone has/is doing this. Here are some figures I have been playing around with:

Mortgage repayments: $1950
Interest Component: $1700
4 People living in home (2 owners/2 boarders)
Boarders paying $100 each per week and all utilities split evenly

Without declaring boarders income:
52 x $200 = $10,400 profit

With declaring boarders income:
Boarders rent received per year: $10,400
Interest paid over year: $20,400 (claim only half $10200)
Rates/water/insurance: $2000 (claim only half $1000)
- 30% of boarders for tax ($3120) + around 30% of interest/rates back ($3360)

$10640 Profit

Seems that you would be barely making a difference between declaring or not decalring? Am I missing something blatantly obvious here or would it only be better to declare in some situations?

alexlee · 6th May, 2007

hobo-jo said:
So you would end out around 10% worse off by declaring the boarders rent payments as income? Am I missing something blatantly obvious here or would it only be better to declare in some situations?

Ignoring the numbers for a moment, technically wouldn't it be illegal to NOT declare, though I don't see how the ATO would find out.

Also, if you have borders paying you rent and you're living in it yourself, the CGT exemption gets a bit screwed up. Can someone confirm whether you have to apportion the CGT exemption because you're using part of the property as an IP?
Alex

hobo-jo · 6th May, 2007

Rejigging the figures (after some wrong calculations by myself) it would seem that you do end up slightly better off (updated first post).

Would it depend on the way you received the rent as to whether you were legally required to inform the ato? ie if the money was paid into a bills account where money is used to draw bills from, are they really paying you rent or are they just paying the bills to stay with you...?

jingo · 6th May, 2007

hobo-jo said:
Rejigging the figures (after some wrong calculations by myself) it would seem that you do end up slightly better off (updated first post).

Would it depend on the way you received the rent as to whether you were legally required to inform the ato? ie if the money was paid into a bills account where money is used to draw bills from, are they really paying you rent or are they just paying the bills to stay with you...?

Hi Hobo-Jo,

This could be treading on thin ice as far as the ATO was concerned if they really dug into your situation.

I do know of someone who has borders. It did help her pay off her PPOR. Now she's into commercial property and doing very well out of it.

Could be a good strategy to consider Hobo-Jo, especially if you want to get the debt down on your PPOR.
All the best,

Regards Jason.

twobobsworth · 6th May, 2007

Who would want the hassle and lack of privacy? A complete stranger living in your house...no thank you.

hobo-jo · 6th May, 2007

twobobsworth said:
Who would want the hassle and lack of privacy? A complete stranger living in your house...no thank you.

I guess it comes down to the sacrifices you are prepared to make to have a better life down the track. Right now my partner and I are 22/20 and most people our age would be in shared houses anyway.

Les · 6th May, 2007

G'day Hobo,

I believe there is more to it than is immediately apparent:-

Hobojo said:
She said that more often than not you would be better claiming at as income as you can then claim back many things around the home on tax.

And Jan is right. What is NOT said is that the etra Income can count toward your DSR should you decide to buy more (whenever that is).

Think of this:- If you are wanting to buy another IP, a lender will look at your Income vs Expenses, yes? Now, if you and your partner were putting your case (but hiding the income you receive from boarders) it will be harder to "move ahead". Any Income should be "validated" (declared) so it can be used in such a situation.

Let's face it, if you DIDN'T have these boarders, your Rates, Insurance, Mortgage, would still be the same cost to you. So, by having the boarders, you INCREASE your chances with a lender by declaring their Income (rathr than keeping it "under the table"). And, as you already posted, Jan shows how you are better off anyway to declare it (I didn't notice depreciation in your calcs - that can help more too).

In a few words, then, by declaring the Income, it puts you streets ahead when wanting to "move on" with lenders. And you get to sleep at night too.

Regards,

hobo-jo · 6th May, 2007

Appreciate the feedback, it would seem silly hiding the rent considering the benefits. My main concern was CGT and how that works I guess. Say I was to sell the place after having had boarders for 2-3 years I imagine I would have to pay some CGT. If I was to however board the rooms for 2-3 years, turf them out and live in the place with just myself and partner for 12 months would we then no longer have to pay CGT, or would CGT always be applicable due to at some stage holding the property we have used it to gain an income...

I don't imagine depreciation would be applicable in this case as the house is 50 odd years old.

The Y-man · 6th May, 2007

hobo-jo said:
I don't imagine depreciation would be applicable in this case as the house is 50 odd years old.

Are the kitchen, bathroom, electricals, etc etc etc all 50 years old?

Cheers,

The Y-man

ps. I believe you will need to pay CGT based on the portion of the house which was used to generate income.

jingo · 6th May, 2007

hobo-jo said:
I guess it comes down to the sacrifices you are prepared to make to have a better life down the track. Right now my partner and I are 22/20 and most people our age would be in shared houses anyway.

Totally agree with you Hobo-jo,

I lived in a residential college when I was your age as a student. Loved it might I say, but it wasn't making me any money!!!

Hey, I think its a better idea than an idea I gave to you on another thread suggesting that you move in with either your parents or your inlaws (if that's the correct term, sorry if it's not) and renting out your house! Not to mention that you will possibly achieve a higher return this way than by renting the house out.

Another plus - you are a live in land lord - Your borders are not going to trash the place while you are there - as for paying the board - they probably will with the 'landlord' living with them!

I say go for it!!!

Xenia · 6th May, 2007

Hi Hobo,

I've noticed you are from Adelaide. Are you talking about a "home stay" arrangement? If so you can have up to 3 students without declaring the income at all. The accountants that run the program are MGI Caulfields on Greenhill Rd, may be worth talking with Des Caulfield if you are concerned.

They must be Home Stay! If they are other types of boarders then the income needs to be declared. Again, Des should be able to tell you which of the schools do home stay and which need to be declared.

Hope this makes sense!

outbackjack · 7th May, 2007

Two dwellings on same block

This was similar to what I was going to do.

I have just brought a IP. It is on a 900 sqm block, current house is at front of the block. I was thinking of putting a granny flat up the back part of the block and live in it.

I would get about 270 per week for the house.

I could of then deprecaite the new building, current one is over 20years.

However I am not sure of the complications etc.

letiha · 7th May, 2007

if the house was firstly your PPOR before the boarders moved in, wouldn't you gain the CTG exemption for 6 years.

I', lloking at doing the same thing with my place, but the person who is moving in is a friend who currently lives with me in a rental.

chan · 7th May, 2007

letiha said:
if the house was firstly your PPOR before the boarders moved in, wouldn't you gain the CTG exemption for 6 years.

I', lloking at doing the same thing with my place, but the person who is moving in is a friend who currently lives with me in a rental.

Is a rental contract required? How about the bond and other stuff?

Kennethkohsg · 7th May, 2007

alexlee said:
Also, if you have borders paying you rent and you're living in it yourself, the CGT exemption gets a bit screwed up. Can someone confirm whether you have to apportion the CGT exemption because you're using part of the property as an IP?
Alex

*******************
Dear Alex,

1. I believe so;- as this is also my present understanding on how the tax laws applies under such circumstances.

2. Thank you.

regards,
Kenneth KOH

Kennethkohsg · 7th May, 2007

twobobsworth said:
Who would want the hassle and lack of privacy? A complete stranger living in your house...no thank you.

*************************
1. ... and not forgetting the attendant risk of being sued for personal loss and damages suffered by the boarders if any of the paying boarders happen to hurt themselves at our own PPOR premises.

2. I do not think that the usual landlord insurance coverage applies here, in this context too.

3. For your kind update and further considerations, please.

4. Thank you.

regards,
Kernneth KOH

alexgsz · 8th May, 2007

jingo said:
Hi Hobo-Jo,

This could be treading on thin ice as far as the ATO was concerned if they really dug into your situation.

I do know of someone who has borders. It did help her pay off her PPOR. Now she's into commercial property and doing very well out of it.

Could be a good strategy to consider Hobo-Jo, especially if you want to get the debt down on your PPOR.
All the best,

Regards Jason.

Sorry to sidetrack the thread, but would family members who pay rent be considered boarders and thus should be declared to the ATO or not?

We rent out one of our back rooms of our PPOR to brother in law for $100 per week, which we current don't have declared. My concnern is that its paid automatically into my bank account every week with the same description, might look suspicious if we were ever audited.

Are we required to declare this as an income? I've mentioned it to the accountant who said it wouldn't be worth the losses in CGT, however we're not planning on selling so am not concerned about CGT.

Pablo · 9th May, 2007

Alex,

If they are paying you rent then you should be declaring it. It makes no difference if they are a family member.

Hobo-jo,

Also dont forget you can claim depreciation on the common furniture etc. so in your case if you were to buy a new lounge you could claim 50% of the depreciation on it.

Simon · 9th May, 2007

What if you don't charge rent to the family member. Should be problem with him contributing $100 pw to bills etc.

Adult kids do this all the time when they stay on at home.

alexgsz · 9th May, 2007

Simon said:
What if you don't charge rent to the family member. Should be problem with him contributing $100 pw to bills etc.

Adult kids do this all the time when they stay on at home.

How do you tell the difference between what he pays as being for "bills" or "rent"
The end of the day the bill he is helping pay is my morgage.

Wouldn't I be better off if i declared it to the ATO as I could claim a quarter of the house's intrest (its a 4 bedder), and improve my serviceability?
My intention is to hold onto the house indefinatly, turning it into a rental property if/when we move out (not in the next 3-5 years) so I don't see the CGT losses as a major issue.

Renting out Rooms

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hobo-jo

alexlee

hobo-jo

jingo

twobobsworth

hobo-jo

Les

hobo-jo

The Y-man

jingo

Xenia

outbackjack

letiha

chan

Kennethkohsg

Kennethkohsg

alexgsz

Pablo

Simon

alexgsz

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