Rental Properties & AirBNB - Navigating the Complexities

Why Invest in Rental Properties?

Investing in long-term rental properties or short-term AirBNB style rentals can provide a steady stream of income and significant long-term capital gains. With the right property and strategy, you can achieve a reliable cash flow while building equity over time.

The long-term rental market in Australia remains strong, offering high occupancy rates and rental prices at or near record highs - although yields remain low relative to house prices. Short term rentals such as AirBNB offer property owners the flexibility to earn a higher income yield by renting their properties on a short-term basis. This can be particularly lucrative in tourist hotspots and major cities where demand for short-term accommodation is high.

But as with any business or large investment, it's important to understand the market, the cost vs benefit, the risks, and tax implications.

Tax Deductions: Rental Properties

To reduce the tax burden that comes with earning rental income, you can claim certain expenses against this rental income, such as:

• Property management fees
• Maintenance and repairs
• Council rates
• Insurance
• Mortgage interest
• Depreciation on the building, fixtures & fittings.

Please note that this is not an exhaustive list.

Additional deductible costs that may be incurred when renting your property out on the short term rental market include cleaning, food and consumables provided to guests, depreciation on furniture, electricity and other utilities to the extent that they relate to the property being rented.

It is important to note that if you only rent out part of your property, or you only offer your property for rent for part of the year, all expenses will need to be apportioned.

Capital Gains Tax and The Main Residence Exemption

If you are considering renting out your main residence (or part thereof), it's crucial to understand the implications related to Capital Gains Tax (CGT). Generally, your main residence is exempt from CGT.

However, using your home to generate income can trigger a partial CGT liability when you sell the property. This can catch people by surprise, as they often realise a large capital gain when selling their home, and having to declare a portion of this as a taxable capital gain can lead to a substantial tax bill.

It's important to keep detailed records of the periods when your property is rented out versus when it's used as your main residence. If only part of the property was rented out, you will also need evidence of how much of the property was rented out, or available for rent, vs how much was continually used as your main residence. This will help to ensure that you accurately calculate the taxable portion of any capital gain. 

Council Laws and Regulations: Short Term Rentals

Property owners looking to offer short term rentals in Australia must navigate various council laws and regulations that can affect their ability to rent out properties. Different councils have specific rules regarding short-term rentals, including zoning laws, maximum occupancy limits, and requirements for obtaining necessary permits or approvals as well as limits on how many days the owner can rent to someone within a specific period.

Failure to comply with local regulations can result in fines or legal action. Therefore, it’s essential to research and understand the specific requirements in your area before listing your property on AirBNB or a similar platform. Staying informed and compliant ensures a smooth and profitable hosting experience.

Depreciation Reports: A Key Tool for Property Investors

Depreciation reports are a critical tool for property investors looking to maximise their tax deductions. These reports provide a detailed schedule of depreciation claims available on the building and its fixtures over time, allowing investors to claim significant tax benefits.

Consulting a qualified quantity surveyor to prepare a depreciation report can ensure that all eligible deductions are captured. Regularly updating these reports with any new improvements or renovations can lead to further tax benefits.

Would you like to gain clarity around the complexity of property tax obligations and maximising deductions for your investment? Have a chat with our team at BLG Business Advisers to gain insight and support.