In today’s economy, many Australians are exploring creative ways to ease financial pressure—especially when it comes to managing mortgage repayments. One popular strategy is renting out a room in your own home. While this can provide a steady stream of income, it’s important to understand that it may also have tax consequences, particularly when it comes time to sell your property.
At Boa & Co. Chartered Accountants, we frequently help homeowners like you navigate these situations—balancing the benefits of rental income with the potential impact on capital gains tax (CGT). To better explain this, let’s look at a real-world example that many of our clients can relate to.
Case Study: Michael’s Story
Michael purchased his home in July 2018 for $700,000 and sold it in January 2024 for $1.1 million. During the entire period, this home was his principal place of residence (PPOR).
As a single professional, Michael decided to rent out one room in his home to help accelerate his mortgage repayments. Tenants also shared common areas, such as the kitchen and bathroom. Over time, he reported rental income and claimed 35% of his property-related expenses—such as interest, council rates, and utilities—as tax deductions.
When he later sold the home, Michael assumed the main residence exemption would fully protect him from capital gains tax. However, because part of the property had been used to generate income, a portion of the capital gain was taxable.
What Did This Mean for Michael?
- 20% of the home was exclusively rented out
- 15% of the common areas were shared with tenants
- Therefore, 35% of the property was considered income-producing
The ATO requires homeowners to apportion the capital gain based on the portion of the property used to earn income. So, even though Michael lived in the home the entire time, he wasn’t eligible for a full CGT exemption.
Was Renting Out the Room Worth It?
For Michael, renting out a room provided clear short-term benefits:
- Extra cash flow
- Help with loan repayments
- More financial flexibility while living alone
However, as this case shows, there are long-term tax consequences to consider when renting out part of your home. Michael’s partner—who works at the ATO—encouraged him to seek professional advice. That’s when he turned to Boa & Co. Chartered Accountants for clarity and peace of mind.
What You Should Know Before Renting Out a Room
If you’re considering renting out a room in your home, here are some important tips from our team:
1. Get Personalised Tax Advice
Before listing your spare room online, speak with a qualified accountant who understands the tax implications for homeowners. Every situation is different, and expert advice can help you make informed decisions.
2. Understand the Impact on Capital Gains Tax
Even if the property is your main residence, renting out a portion may reduce your CGT exemption when you sell. The ATO assesses how much of the property was used to earn income and for how long.
3. Keep Proper Records
Always keep detailed records of:
- Rental income received
- Dates the property was rented
- All expenses (loan interest, maintenance, rates, utilities)
- The area of the home that was rented
These records will be critical when calculating any future capital gains tax.
4. Use a Formal Agreement
Having a written rental agreement protects you and your tenant, sets clear expectations, and serves as evidence if the ATO ever reviews your arrangements.
5. Review Your Insurance
Standard home insurance policies may not cover tenancies. You may need landlord insurance to protect against property damage, liability claims, or rental loss.
Thinking About Renting Out a Room? Let’s Talk First
Renting out part of your home can be a great financial strategy—but only if it’s done with the right planning and tax structure. At Boa & Co. Chartered Accountants, we help clients make smart, informed decisions by providing tailored tax advice based on your unique circumstances.
Whether you’re renting a room for the first time or preparing to sell a property you’ve partly leased, our experienced team is here to guide you through the financial and tax implications—so you avoid surprises later.
Reach out to Boa & Co. Chartered Accountants today to make sure you’re on the right track. Call us on 1300 952 286, email [email protected], or visit www.boanco.com.au to schedule a consultation.