Airbnb tax deductions and the interpretation of how taxation laws revolve around using your property for Airbnb cause a lot of confusion to say the least.
Not only are investors keen to find out what they can claim, but they also need to understand how much they can claim as well as what the implications are on capital gains tax – something that catches a lot of Airbnb hosts off-guard!
To be clear, earning additional income means additional taxes. The same principle applies for generating another source of income through your property. But Airbnb tax deductions can be used to reduce your tax liability.
So if you’re reading this, you’re likely either already an Airbnb host or you’re considering using your investment property for Airbnb. So what does this involve and how do you take advantage of Airbnb tax deductions?
Airbnb Tax Deductions: Property Living Situation
Before getting into the nitty gritty of how the tax system works for 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 you engage in a qualified accountant to assess your individual situation.
There are two scenarios that can affect your Airbnb tax deductions:
- If you rent out your entire home for Airbnb
- If you rent out a portion of your home for Airbnb
These two scenarios mean that you can claim expenses as Airbnb tax deductions into three categories:
- Expenses and tax depreciation directly associated with the rented area (e.g. bedroom) can be deductible in full
- Expenses and tax depreciation for shared areas need to be apportioned
- Expenses related to the private area only for the host is not tax-deductible
Short Stay Accommodation vs Residential Rental for Airbnb Tax Deductions
Short stay accommodation such as hotels, motels and guesthouses have significant advantages in claiming tax depreciation at a rate of 4% provided that the property commenced construction after 27th February 1992.
Unfortunately, Airbnb isn’t classified as short stay accommodation. Instead, it’s classified as a regular residential investment property. This means that it qualifies for Division 43 Capital Works as long as long as it’s commenced building after 15th September 1987 or underground capital improvements from 27th February 1992.
Division 40 Plant and Equipment such as your rangehood, air conditioning units, hot water systems or similar are eligible for depreciation if they’re purchased brand new from a retailer or are part of a new renovation. Unfortunately, with the recent 2017 legislative changes, second-hand or previously used plant and equipment are not depreciable.
Airbnb Tax Deductions Renting Out an Entire Home
If you don’t live in the property and the entire property is used for the purpose of rentals, you can claim depreciation as an Airbnb tax deduction on the entire premise, even if no one was occupying the property.
What you must be most careful of is that you need to ensure that your property is available at market rate. This is to stop people from renting out the property to family and friends at discounted rates to take advantage of Airbnb tax deductions and depreciation.
If you move back into the property, you cannot claim depreciation or any Airbnb tax deductions from the date you move back in. Instead, you’ll need to calculate your Airbnb tax deductions pro-rata for the period the property was available for rent.
Airbnb Tax Deductions Renting Out a Portion of your Home
To calculate Airbnb tax deductions when you only rent out a part of your home, this is called apportioning – something that a lot of owners aren’t aware of.
This is calculated based on the amount of floor area that’s used for private and rental purposes.
Bear in mind that due to the 2017 legislative changes, Division 40 Plant and Equipment such as air conditioners and ovens are not claimable unless it’s brand new and isn’t owner-occupied, i.e. you don’t live in the home.
What Depreciable Assets can I claim for Airbnb Tax Deductions?
For Division 40 Plant and Equipment, if they have been purchased specifically for the purpose for the use of Airbnb, you can claim the entire Airbnb tax deduction benefit for the asset. This includes:
- Tables and chairs
However, if an asset is shared such as bathrooms and living rooms, they are only partly deductible as Airbnb tax deductions and once again apportioned and pro-rated depending on the usage.
For Division 43 Capital Works, apportioned floor space comparing rental area vs owner-occupied is the determining factor.
Other Airbnb Tax Deductions
Dependent on whether you rent out a portion of your property or the entire property, you could potentially claim the below as Airbnb tax deductions:
- 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 below 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 also rent out some rooms for Airbnb, the ATO has outlined that you will not be completely exempt from the main residence capital gains exemption.
Even I 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. What this means is that you’ll likely need to pay capital gains tax on a portion of any capital gain (profit) realised when you sell your main property.
To accurately calculate capital gains tax, it’s best to keep accurate records to indicate clear starting (and ending) points. These are then factored in with the following:
- Total floor space apportioned towards producing assessable rental income
- Total time period of use for the purpose of Airbnb rentals
- Eligibility for the absence rule
- Whether the property was first use to produce income after 20 August 1996
To calculate this, the ATO has a handy Property Exemption Tool. Alternatively, we recommend speaking to your tax accountant.
Do I Need to Charge GST for Airbnb?
Airbnb falls under residential taxation laws and therefore, GST is not applicable to Airbnb (even if the earnings are over $75,000).
This also means that you can’t claim GST credits for any expenses or costs related to the property.
State Government Laws on Short-Term Rental Limit
It’s important to pay attention to state-specific laws relating to how many nights you can rent out your property for the purposes of Airbnb. In NSW, this is limited to 180 nights a year and all letting activity is still deemed to be residential rather than commercial for tax purposes.
You can transition to long-term leases for the remainder of the year after you exhaust the 180 day limit to still be able to claim Airbnb tax deductions for the full year.
The important thing to remember is that having the property actively available to rent is sufficient in claiming tax deductions for the entire year. If you elect to move into the property as your main residence, then you will need to apportion your tax deductions accordingly.
We also recommend working closely with your accountant to ensure you’re calculating this accurately.
Every investor’s situation is different. Whether you’re living in the property and partially renting it out or completing renting out the property as an Airbnb, these circumstances all have a part to play in how you can claim rental property depreciation.
Given the complexity of the situation, investors would be wise to discuss their tax matters with their accountant to ensure that they’re getting the most out of tax depreciation for their investment property.
Tax depreciation on your plant and equipment as well as your capital works is the second largest tax depreciation opportunity for investment properties after interest and should always be considered when looking into maximising your Airbnb tax deductions.
Before considering using your property for Airbnb, we recommend the following:
- Seek advice from your accountant and understand the full tax implications of renting your property
- Ascertain a valuation on your property before you rent it out to estimate CGT impact
- Keep records of all your Airbnb rental activity and disclose your Airbnb income in your tax return to ensure you can claim all Airbnb tax deductions
- Engage a quantity surveyor for a tax depreciation schedule to maximise depreciation claims on plant and equipment as well as capital works
At Duo Tax, our tax depreciation schedules provide both the prime cost and diminishing value depreciation schedules (you can compare them in our sample report). They’re designed for both investors and accountants so that you can determine what is best for you.
Our ‘Duo 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.