Airbnb has become a popular new source of income for the homeowner who wants to make a few extra dollars. But like every way of making money there can be downsides. And in the case of Airbnb the following downside is not generally known.
There is a common false belief that homeowners who offer their home for rent on Airbnb can rely on the “six-year rule”. This is a provision in the tax regulations that allows homeowners to be absent from their home for up to six years without losing the capital gains tax exemption.
What could be simpler? You go travelling for a couple of months, rent your house out while you are away, and keep the capital gains tax exemption because you haven’t been away for more than six years.
Accountant Julia Hartman of BAN TACS, and my co-author of Winning Tax Strategies, heard that the ATO was taking a narrower view than this, so she sought a private ruling from the tax office. The decision may surprise you.
In the eyes of the tax office, the six-year rule requires the homeowner to be residing elsewhere. The home must cease to be your main residence. The ATO feel this is not a matter of a few weeks’ absence – you need to take up residence in a different home and do all the things that a change in residency requires. This includes changing your mailing address and drivers licence address, and having the electoral roll amended.
Of course, this changes the landscape totally and brings capital gains tax into play.
Case Study: A couple decide to rent their house out on Airbnb while they are on holidays. As this is the first time they have used the house to produce income, the CGT cost base is now reset to today’s market value of $600,000 and they will be required to keep records of all expenditure relating to the house from that date.
When they sell they calculate the full capital gain, then apportion it between days covered by the main residence exemption and days not. The days it was not covered will be the days it was available to rent, not necessarily the days it actually earns income. It is listed on Airbnb for 10 weeks before they find a tenant, who takes it for three weeks.
That is a total of 13 weeks it was available to produce income: a quarter of the year. Let’s assume they do the same for the next four years and the house goes up in value by 5% a year, that is $729,304 – a gain of $129,304.
That $129,304 capital gain may be reduced to, say, $100,000 if they have kept good records. Under the pro rata time rule, 25% of the capital gain will be taxable. After the 50% CGT discount that is $12,500. If their marginal tax rate is 39% the tax on that gain would be $4,875.
If the above scenario was repeated for four years they could probably expect to receive a total of $12,000 income. This assumes they net $1000 a week after Airbnb fees, breakages, cleaning, and possibly a small deduction for interest. After paying tax at 39% they only end up with $7,320 in their hand for the four years. Out of this, they pay CGT of $4,875, leaving them a paltry $2,445, while the taxman gets $9,555.
Obviously it’s a matter of doing the sums. You’ll need to think about another quirk in the regulations too: your house loses its CGT exemption while it is available for rent, but interest and other expenses cannot be claimed as a tax deduction if you are still living there waiting for a booking. On the other hand, the interest that can’t be claimed as a tax deduction can be added to the base cost of the property and so reduce any capital gains tax that may be payable. Go figure!
For more details see https://bantacsfinancialsolutions.com.au/Jblog/the-tax-and-record-keeping-consequences-of-holiday-rentals-such-as-airbnb/