19 April 2022

Should you rent out a spare room in your home?

Emma McLaren
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If you have a spare room in your home, renting it out is an option you might consider, either short-term (e.g. for Airbnb rentals) or longer term. But it’s essential to understand the pros and cons to help you decide whether to do it or not.

Read on to find out everything you need to know about renting out a spare room in your home, including:

  • the pros and cons.
  • tips for doing it successfully.
  • answers to FAQs.

The pros and cons of renting out a spare room

Renting out a spare room in your home has pros and cons. Let’s look at the advantages first.

Pros

  • Earning extra income

This is the number one reason people rent out a room in their home. You can charge your lodger rent, and you can use that rent for extra spending money or to help you pay off your mortgage faster.

  • Claiming tax deductions for property expenses

If you rent out a room in your home, you will be able to claim a portion of your home expenses as tax deductions. For example, a portion of the interest on your mortgage, council rates, utility bills, home insurance, and cleaning/maintenance costs. A tax agent will be able to let you know how much you can claim. You can’t claim any of these expenses in your residential home if you’re not generating any taxable income from it.

But it’s important to understand that you’ll only be able to claim tax deductions if you also declare the rent you receive as income. If you don’t, you won’t be able to claim any tax deductions.

  • Company

Renting out a room in your home can provide you with extra company. You might even make a new friend.

  • Having a house sitter while you’re away

If you need to go away for work or a holiday, it can be handy to have a live-in house sitter to feed any pets you might have or to do other necessary household tasks.

Cons

Renting out a room in your home also has its drawbacks.

  • Paying more tax

This includes more income tax and potentially capital gains tax (CGT) if you sell. CGT is a tax on the profit you make from the sale if you have used the property to generate income. You won’t have to pay CGT when you sell your home if you haven’t rented out a room in it to generate income.

  • Less privacy

Having an extra person in your home invariably reduces the amount of privacy you (and any other members of your household) have.

Tips for renting out a room in your home

  • Make sure other members of your household are comfortable to do it

Talk to everyone about the pros and cons of renting out a room in your home and make sure everyone is comfortable with it. If not, you could be creating issues.

  • Screen potential long-term tenants carefully

This is a no brainer, especially if you take in someone you don’t know. The tenant you select must be honest and trustworthy.

Interview potential tenants to check for lifestyle compatibility with you and your family. Check their rental history with the relevant authority in your State or Territory. Ensure you get references from their current landlord and employer before offering your room to the best candidate.

  • Negotiate a formal lease agreement for long-term tenants

It’s important to have a formal lease agreement that clearly outlines the rights and responsibilities of both you as a landlord and a long-term tenant. This helps to ensure that there are no misunderstandings.

Standard lease agreements are for six or twelve months. Your lease agreement should include a provision for a bond to be held with the residential tenancy authority in your State or Territory. A bond holds your tenant accountable for treating your home well. The tenant forfeits all of their part of their bond for causing any damage.

  • Set some rules and schedules

Schedules for kitchen and bathroom time can help you and your tenant avoid wanting to use the same facilities simultaneously, especially if your home has one bathroom or one kitchen.

You might also need to discuss and agree on who is responsible for different household tasks. For example, if your tenant has exclusive use of a second bathroom, they should be responsible for cleaning and maintaining it.

You should also agree on who pays what for usage bills like electricity, internet and streaming services, and whether or not you each buy your own food.

FAQS – Renting out a room in your home

Do I need to have a rental agreement to rent out a room in my home?

No, but it’s highly recommended to help you avoid problems. Even if you’re renting a room out to a friend, a rental agreement helps to clarify responsibilities.

Does renting out a room in your home affect your home insurance?

Yes, it usually does. Most home and contents insurance policies don’t cover damage caused by tenants renting out a room in your home. You will usually have to take out landlord insurance to be covered, or if you’re using a short-term rental service like Airbnb, you have the option of taking out this insurance via their provider.

Can you rent out a room if you’re renting a home?

This depends on the terms and conditions of your lease, but you will usually need your landlord’s approval.

Do you have to declare your rental income if you rent a room in your home?

Legally, yes. Doing that also allows you to claim tax deductions for any expenses associated with renting your home.

The bottom line

Renting out a room in your home is a big decision. It can be worthwhile if the pros outweigh the cons, and you’re smart about how you do it and select a suitable tenant.

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