This is long, but if you're an in-home host with part of your home listed on Airbnb, it's worth reading.
In most cases, Airbnb income is treated as passive investment income from an investment property, and the relevant treatment of expenses, including depreciation is the same as for any investment property.
As an in-home host [ i.e. your listing is part of your main residence rather than on a separate title ] you need to be aware that you will lose the Main Residence Exemption from capital gains tax that would otherwise apply for that portion of your main residence that is used to create assessable income. The partial loss of the this exemption will generally be based on percentage floor area devoted to income producing (i.e. Airbnb) activities, regardless of the number of nights your listing is actually occupied and producing income.
For this reason, in-home hosts in Australia need to pay particular attention to the likely increase in value of their property and the trade-off between loss of the exemption and occupancy rates.
To illustrate this point, here's a worked example* -
Current Main Residence value is $2m
Average long term capital price growth is 6%
Proportion of Main Residence used for Airbnb is 40%
Average Airbnb occupancy rate is 50%
Airbnb annual payout based on 50% occupancy is $70,000
Gross margin (i.e. payout less direct costs such as cleaning, linens, food, utilities etc) is 70%
Based on the above, we know that -
Assessable income from Airbnb is 70% x $70,000 = $49,000
Annual capital growth is 6% x $2m = $120,000
The marginal tax rate incl of Medicare levy applying to your Airbnb income is 39.5% (ie assessable income from all other sources is $80,000)
You intend to sell the property in 5 years time and during this period the revenue per night, occupancy levels and gross margin remain stable.
Assessable income from Airbnb is. 70% x $70,000 = $49,000. At a marginal tax rate of 34.5% (32% plus Medicare Levy). Net income from Airbnb after tax is, $49,000 x (1-.395) = $29,645.
This needs to be weighed up against the future tax liability accruing because of the loss of Main Residence Exemption when sold in 5 years time. This is calculated as follows -
House value in 5 years is, $2m x (1 + 6%)^5 = $2.68m
Capital gain that is not exempt is, 40% x ($2.68m - $2m) = $272,000
Assessable capital gain after applying CGT discount for holding asset > 12 months is, $136,000.
Assuming that the marginal tax rate to apply to $136,000 in year of disposal will be 42% (a blend of 2 highest brackets + ML levy). Therefore, the additional tax liability created by your Airbnb hosting activities in the year of disposal is, $136,000 x 42% = $57,120 The additional future tax liability accruing each year is $57,120/5 = $11,424
This is a very crude calculation that makes many assumptions. However the bottom line is that the real after tax revenue from the Airbnb activities in this example is only, $29,645 - $11,424 = $18,221. Not much is it, especially when you consider that 'on paper' the Airbnb expected revenue started at $140,000 per year.
Of more concern is that if housing price growth increased from the long run average in Sydney of 6%. Look what happens to your after tax profit when housing prices grow by just 8%.
At 8%, the future tax liability on this property (assuming the blended marginal tax rate is now a higher 44%) would be ....
Future property value is, $2m x (1 + 8%)^5 = $2,938,656
Non-exempt capital gain after applying CGT discount is, (.4 x $938,656)/2 = $187,731
Future tax liability created by Airbnb activities is, $187,731 x 44% = $82,602.
Per year is $16,520. This gives a net benefit from hosting of just $13,125 per year.
Imagine a perfect storm of a higher than average increase in housing prices plus more hosts entering the market which then leads to lower occupancy levels and a lower price per night accommodation fee because of increased competition in your area. The current tax situation, in which the loss of the MRE is linked to time offered to market rather than actual occupancy levels, could lead to your after tax revenue from Airbnb actually being zero or even negative. Not a nice thought is it?
Whilst I don't doubt that lobbying your local member/council whatever to allow hosting in your area is a morally uplifting endeavour, to in-home hosts it's possibly shooting themselves in the foot. Surely in-home hosts have a huge vested interest in seeing non in-home hosts closed down?
A proliferation of any type of listing will increase competition and depress prices and, in theory, non in-home hosts can afford to list at a lower price per night than in-home hosts because they are not so inequitably treated by the taxation regulations. I say this because non in-home hosts who rent out their Main Residence are allowed to take advantage of the Absence Exemption, which means their property still remains shielded from CGT. Those who list properties that aren't their Main Residence would never have been shielded in the first place, so they have nothing to lose by listing on Airbnb either.
Given this, if in-home hosts have the time and energy to lobby, please spend it on the issue that matters to you.
* Note - This is a simplified model for illustrative purposes only. It doesn't take into account your individual tax situation, depreciation or the apportioning of fixed costs such as insurance, rates, mortgage interest etc, nor does it adjust for the present value of future cash flows. It also assumes that Airbnb revenues do not increase with increases in the capital value of the property; though this may be a reasonable assumption as average revenue per listing may remain static or even decline as more hosts enter the market and supply of listings outstrips demand from guests. These factors should always be considered when analysing your individual situation.
Correction: 2 errors
"At a marginal tax rate of 34.5% (32% plus Medicare Levy)" should read, "....39% (37% plus Medicare Levy)". Also, where I've used 39.5% in the first example I should have used 39%. The result is that the figures for net yearly income after tax are out by $245 . It should be $29,890.
Jeez Louise, that's really something to be concerned about. We must pursue this further and see what we can do to change the situation, or it's really not worth continuing as hosts.
thanks for putting the time into modeling this. Let's continue the conversation!
I am trying to figure this all out. Is it possible that we can just pay income tax on the amount we earned for the year instead of bringing the house/CGT/claims into it.
Bec, it's my understanding that the CGT issue is completely separate to the income tax element. I believe that you should be declaring the income as a matter of course, and paying income tax on it accordingly.
Fantastic article and this has always been the case whether you let part of your home through Airbnb, use it for business or rent privately.
My question around Airbnb and CGT tax specifically, which I cannot seem to get a straight answer from any accountant, is regarding renting 100% of the home when you are away and living out of home.
Two scenarios here and both involve the fact that you purchased the home as your main residence and have lived in it before renting it out:
1. You rent the home for 4 weeks of the year - i.e. when you are away for work/holiday.
2. You decide to turn your main residence into a rental property - renting it all year round - but use Airbnb to generate your rental income.
The question that comes to mind is, with both scenarios can you choose to have a dwelling treated as your main residence for capital gains tax (CGT) purposes even though you no longer live in it, under the '6 Year Rule'.
I have been advised both yes and no for both scenarios by different accountants / professions.
I would think you are pretty safe for scenario 2 - since the Tax office doesn't treat Airbnb as a business income and treats it as rental income - so if you did this with a long term tenant - you can use the rule. Thus if you do not rent for more than 6 years - the property is CGT free.
Scenario 1 is trickier. If you can claim the rule - then as I see it as you move back in - and the 6 years resets - it is unlikely your PPR will be subject to any CGT.
If anyone has any thoughts or any accountants they can recommend - I would be interested to hear from them.
Excellent post thanks.
I now believe it is quite possible for in home hosts to make an overall loss, considering CGT.
After all that risk, hassle and work !
No wonder there is a rental afffordibility crisis in places like Sydney.
I think there is a large amount of rentable space being wasted because home owners think about it, but just decide it is not worth it.
I believe the UK has a great scheme called rent a room, where you can let rooms and be tax exempt.
I have just received this e-mail from my accountant:
Airbnb and the Australian tax system
Airbnb is one of many examples of the “sharing economy” — connecting buyers (users) and sellers (providers) through a facilitator that usually operates an app or a website. But consideration needs to be given to several possible tax issues — income tax, claiming expenses, CGT, GST and
even PAYG instalments. This is an extract from Tax and Super Australia magazine
CAPITAL GAINS TAX
Broadly, the sale of an individual’s primary residence is CGT-free under the main residence exemption if:
However, as hosts are renting out a portion of their home on Airbnb, they are using a portion of it to produce assessable rental income and therefore would only be only eligible for a partial main residence exemption. This means that hosts may be taxed on a portion of any capital gain realised upon the sale of their main residence.
It is important to note that pre-CGT assets purchased prior to 20 September 1985 are not subject to CGT, regardless of whether they are used to derive rental income.
DEALING WITH A POST-CGT MAIN RESIDENCE
The below scenarios assume the following:
A basic scenario would be one in which a host rented out the same part of their home from the time that they purchased it until the time that they sold it. In this case, the part of the home used to produce assessable income would be subject to CGT and the private portion of the home would be CGT free under the main residence exemption. As with expenses, an apportionment based on floor space may be used to determine the portion of the property that is subject to CGT.
A more common scenario may be where the host began renting out a part of their home some time after moving in. The calculations under this scenario can differ depending on whether the host first began using their home to produce assessable before or after 7.30pm on 20 August 1996.
The reference “first used to produce assessable income” would generally be the first time a host rented a part of their home out (whether on Airbnb or otherwise). However, if the host had previously used part of their home as a home office or workshop at some time in the past, it may actually be that time that the home was first used to produce assessable income.
PRE-20 AUGUST 1996 PROPERTY
Where the host first used their home to produce assessable income prior to 7.30pm on 20 August 1996, they would need to calculate the portion of the ownership period in which they used the entire house for private purposes and the portion in which they were renting part of the house out. Refer to Example 1 below.
This gross capital gain could then be reduced further by either indexation or the general 50% CGT discount, as the property was held for at least 12 months.
POST-20 AUGUST 1996 PROPERTY
Where the host first used their home to produce assessable income post-20 August 1996, the calculation is slightly different. Firstly, the host is deemed for tax purposes to have acquired the property as at the date that the house was first used to produce assessable income and secondly, the host would need to obtain a market valuation at that date, which is then taken to be their deemed cost base to be used in calculating any future capital gain. This valuation could come from a registered valuer or could be calculated by the host, however it is important to note that the ATO has the power to challenge valuations. Refer to Example 2 below.
These two scenarios are relatively straightforward. Where different portions of the house were available for rent during the host’s ownership period, or where the entire house was rented during some periods and was used 100% for private purposes during other periods, the CGT calculations can become very complex.
FINAL THOUGHTS – GOODS & SERVICES TAX
Income from renting out part of a residential property is typically “input-taxed”. This means that hosts should not charge GST on the rent that they earn from guests. Conversely, hosts cannot claim input tax credits for any rental expenses that they incur, but are entitled to claim the GST inclusive amount of any rental expenses as a tax deduction.
Be aware however that GST may apply if host is taken to provide “commercial residential premises” – which includes, among other things, accommodation that is a hotel, motel, inn, hostel or boarding house. Remember also that being registered for GST is subject to the host exceeding the $75,000 turnover threshold.
If hosts report more than $2,000 of rental income on their latest lodged tax return, they may receive a letter from the ATO notifying them that they are required to begin making periodic PAYG instalments. These are essentially prepayments of tax that are offset against the host’s final tax liability at the end of the year upon lodging their tax return.
ASK PLENTY OF QUESTIONS
It is important to remember that every host’s individual situation is likely to be different and while we have provided a general summary of the tax issues facing hosts, it is recommended that practitioners ask plenty of questions to ascertain their situation as the tax outcomes can often turn on slight changes to the fact pattern.
Purchased: 1 July 1991 (used 100% for private purposes)
First rented a portion of house: 1 July 1995 (30% of total floor space apportioned to tenant)
Sold: 1 July 2012
Total days house was owned: 7,671
Total days portion was rented out: 6,210
Gain on sale: $100,000
Calculation: $100,000 x 6,210/7,671 x 30% = $24,286 gross capital gain.
Purchased: 1 July 1991 (used 100% for private purposes)
First rented a portion of house: 1 July 1998 (30% of total floor space attributable to tenant)
Market value @ 1 July 1998: $200,000
Sold: 1 July 2012
Sale price: $500,000
Calculation: ($500,000 – $200,000) x 30% = $90,000 gross capital gain.
This amount may be reduced further by either indexation or the general 50% CGT discount.
* Wei Shiek is founder of Sansdesk Advisors, a virtual accounting practice. Airbnb and the Australian tax system. Airbnb and the Australian tax system. Airbnb and the Australian tax system. Airbnb and the Australian tax system. Airbnb and the Australian tax system. Airbnb and the Australian tax system. Airbnb and the Australian tax system. Airbnb and the Australian tax system. Airbnb and the Australian tax system. Airbnb and the Australian tax system. Airbnb and the Australian tax system. Airbnb and the Australian tax system.
I am considering hosting airbnb but am rather concerned about the capital gains implications (live in Victoria). If I was to run an airbnb for a 2-3 years and then return the home to a residential status - then say sold 3 years later having done no airbnb in those 3 years - would I still be liable to capital gains tax?
An interesting topic.
If you rent out a property and then make it your primary residence for 2 out of 5 years then you don't pay capital gains (atleast in the US). So stop doing Airbnb for 24 months, or move your kids into the Airbnb etc once they are older.
You also don't pay cap gains on increase in land value when you sell. Typically the value of the structure falls, while the value of the land goes up.
Finally for the long term play - wait until you die - your next of kin don't pay cap gains when they inherit and the cost basis resets so they can live a life of joyful hosting.