C&G’s Top 5 Considerations to Make Before Renting Out a Room in Your Home

Tips & Advice

In the current market, demand for rental properties in popular areas is high – so if you own an asset in one of these areas, there’s opportunity afoot! That said, there are important tax and lifestyle implications to beware of before leasing out a room for rent, which C&G discuss in today’s blog.

1. Insurance

Renting out a room may sound enticing in the current market, thanks to high tenant demand in blue-chip areas across Melbourne. Data from flatmates.com.au identified a demand ratio of 59 renters to every one room. Before you jump in, it’s important to consider matters like insurance. Your current owner-occupier insurance arrangement likely won’t cover you or your tenant should you decide to rent one or more of your rooms. Obtain professional advice and ensure you’re compliant – leaving the process until it’s too late could end in disaster.

2. Capital Gains

One of the biggest changes you’ll encounter should you take on a tenant in your property are your capital gains obligations. As the owner-occupier of the home, you are generally entitled to a capital gains tax exemption when you sell the property – but if your home becomes income-generating, you may lose some or all of this privilege.

3. Income Tax

Income from a lodger or tenant is generally subject to income tax on top of your existing income – which means it increases your overall taxable income. This could push you over into a new tax bracket, so beware of owing the ATO more than you’d budgeted for. The only exception to the rule is if your income is classified as ‘incidental income’. This type of income comes from circumstances such as your children paying an amount as ‘board’.

4. Mortgage Restrictions

A major consideration before taking on a tenant in your property is to check whether your home loan restricts this behavior – your lender is the last person you want to be on the wrong side of. Speak to your broker or lender directly before starting any groundwork.

5. Lifestyle Impingement

Aside from the tax and compliance issues, don’t forget to ponder how your lifestyle might affected by having a ‘roomie’. Welcoming a tenant into your own home is quite different to being a traditional landlord. Opening your home to others might mean sacrificing elements of your privacy and lifestyle. Could you handle coming home to find the kitchen a mess? How would you manage a romantic date night when your tenant has nabbed the loungeroom?