IRD has been questioned whether a homeowner who lives in their home and rents a room to flatmates can claim deductions for costs incurred in deriving rental income.
The short answer is yes.
A homeowner is able to claim deductions for costs incurred to the extent the expenditure is incurred in deriving assessable income, which in this case would be the rent.
What can be deducted?
- Insurance
- Local authority rates
- Electricity, gas internet and other facilities
- Repairs and maintenance
- Interest
Apportionment
The home will need to be apportioned between private and income earning use. This can be done based on the use of the physical space which will be divided into 3 categories
- The owners private or exclusive use area
- The flatmates exclusive use area
- Common shared areas
The flatmates area will be treated as 100% deductible and the common area is 50% deductible. The owners private use area will be 0% deductible.
Depreciation
Depreciation loss is not available for residential buildings and so no depreciation can be deducted on the home itself. However, the owner may claim depreciation on chattels used in deriving assessable income, in this case in renting out the room to flatmate.
If the chattel is exclusively used by the flatmate, it can be fully deducted whereas if it is used by both, then some can be claimed.
Interest Limitation and Ringfencing
The interest limitation rule will not apply if the land is used predominantly for the person’s main home. Similarly, the ringfencing rule will not apply if more than 50% of the land is used for most of the income year as the person’s main home.
In order to establish whether the dwelling is a main home, we must consider where the person resides and has a fixed presence. It is broadly where the person has settled, so where they ordinarily eat, live and sleep and use as a base for their daily activities.
For more specific advice regarding your rental property and deductibility, get in touch below.
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