10 Mar Airbnb for Extra Income
In January, a real estate agent referred a young couple to discuss Airbnb – the hero of the sharing economy*.
Their situation was this.
Both are in their early thirties and had recently bought a two-bedroom unit as their Principle Place of Residence. They would also like to start a family in the next few years and in the meantime, get ahead of their mortgage repayments.
To help expedite their repayments, they were very keen on the idea of Airbnb. They had considered getting a flat mate on a more permeant basis but figured they could make more money with regular short-term leases (Airbnb).
Airbnb also suited them if they wanted the house to themselves for a few weeks. They figured it was an easy tap to turn on and off.
After they did all their sums based on an approximate occupancy rate of 85% (44 weeks occupied, 8 weeks vacant), they were convinced Airbnb was the way to go. They just wanted a second set of eyes to look everything over.
Because rental income is deemed assessable, the couple (host) could claim back most of the expenses which fall broadly into two groups:
- Direct Expenses – costs associated with the actual rented area I.e. bedroom
- Shared Expenses – costs associated with shared area such as kitchen and living areas.
Of course, if they were renting out a granny flat, then the expenses would be very easy to define (direct)
The Tax Trap
The couple faced one little tax trap – Capital Gains Tax (CGT). In simple terms, if a primary residence is used for income earning activities, part of the capital gain when the residence is sold will be deemed taxable.
But this is where it can get tricky.
Suppose the couple only Airbnb’d for a brief period and then decided they didn’t like, the house would still be assessable. Therefore, if they held the property for a much longer period than expected, (and did Airbnb for a much shorter period than expected), then their CGT bill could end up being much greater than the income earned. i.e as the property appreciates in value, so too does their CGT liability.
A Common Mistake
When I pointed this out, the husband remarked, “what if we don’t declare it (income)?”
I was stunned. However, a remark like this is not uncommon for someone under pressure. (even though they weren’t in a desperate situation).
But emotion does that.
Very gently, I reminded him his house would be listed on-line and that Airbnb would have to be one of the easiest businesses in the world for the ATO to audit. They could track every transaction in a heartbeat!
It’s a bit like the two house thieves. The dumb one will watch the letter box before he decides to break-in, while the smart one will watch the water meter.
You need to assume the ATO is watching your water meter.
I love the idea of Airbnb but it’s not for everyone. Do your homework first.
Have a great weekend!
* I regard Airbnb as one of the heroes of the sharing economy, but not Uber. The average Uber driver earns less than the average national wage of $15per hr. It’s good for Uber, not the driver.