With ongoing cost-of-living pressures, many homeowners are considering renting out a spare room to generate additional income. While it may seem straightforward, even renting a single room can have income tax and capital gains tax consequences.

Before entering into any arrangement, it is important to understand how the ATO treats these situations and what it could mean for you both now and in the future.

Is Renting Out a Room a Domestic or Commercial Arrangement?

The first issue is whether the arrangement is domestic or commercial. The tax outcome depends heavily on this distinction

Domestic Arrangement

If a family member contributes towards household costs such as food and utilities at non-commercial rates, the ATO generally considers this a private domestic arrangement.

In this situation:

• Payments are not assessable income

• No deductions can be claimed

• Your main residence CGT exemption is not affected

This commonly applies where adult children or relatives contribute to living expenses without a formal tenancy arrangement.

Commercial Arrangement

If you charge market rent and create a landlord and tenant style relationship, even informally, the arrangement is likely commercial.

This means:

• Rent received must be declared as income

• Deductions may be available

• Your main residence exemption may be partially reduced for CGT purposes

Even renting a room through a digital platform can fall into this category.

What Rental Income Must You Declare When Renting Out a Room?

If the arrangement is commercial, rental income includes more than just weekly rent.

You may need to declare:

• Regular rent payments

• Bond money retained due to damage or unpaid rent

• Insurance payouts that compensate for lost rent

• Letting or booking fees

• Reimbursements from tenants where you claim a deduction

• Goods or services provided instead of rent at market value

For a detailed guide on what counts as rental income for tax purposes, read our full article here:

Rental Income: What Counts and How to Report It

Accurate reporting is important. The ATO has data matching capabilities, particularly for digital rental platforms and financial institutions.

What Expenses Can You Claim When Renting Out Part of Your Home?

If rental income is assessable, you may be entitled to claim deductions. However, because you are renting only part of your home, expenses must be apportioned.

Immediate Deductions

These may include:

• Interest on your home loan

• Council rates

• Insurance

• Utilities

• Cleaning and maintenance

• Repairs

• Pest control

• Property management fees

• Advertising

Deductions Over Time

• Depreciation on furniture and appliances

• Capital works deductions for structural improvements

Non-Deductible Costs

• Private expenses

• Costs relating to periods when the room was not rented

• Capital costs of buying or selling the property

We explain this further in our complete guide to rental property deductions which includes example calculations:

Rental Expenses Explained: What You Can and Cannot Deduct

Does Renting Out a Room Affect Your Main Residence CGT Exemption?

This is often the most overlooked issue.

If part of your home is used to produce assessable income, you may lose a portion of your main residence exemption when the property is eventually sold.

The taxable portion is generally based on:

• The percentage of floor space rented

• The length of time it was rented

Importantly:

• Only the rented portion is affected

• The 50 percent CGT discount may apply if the property has been held for more than 12 months

• Capital losses may reduce the gain

While this can sound concerning, the actual taxable amount is often much smaller than expected once the calculation is applied.

Renting out a spare room can provide useful additional income, but it can also create tax implications that are not immediately obvious. Understanding whether the arrangement is domestic or commercial, and how it may affect your income tax and CGT position, is essential before proceeding. If you are considering renting out part of your home, we recommend seeking advice to ensure it is structured correctly from the start.