If you have a spare bedroom or two at home, you may think about renting it out in order to generate some additional income. As you might expect, there are potential tax implications if you do so. The tax implications differ depending on the arrangement you have with the occupant. Broadly speaking, there are three different types of occupants as follows:
According to the IRD’s latest statement, a boarder is somebody (often a student) who is provided accommodation “in conjunction with regular meals and other associated care, activities and benefits that usually, or commonly, occur in a domestic (“family”) household”. While something of a mouthful, essentially a boarder is someone who lives with you as part of your family and in return for paying board gets not only accommodation but also meals, laundry, etc. If you are providing boarding services then the income you receive is taxable, but there is an exemption if the amount you receive does not exceed the standard cost set by the IRD.
There has been a recent change to the thresholds applicable from the 2020 income year. In the 2019 income year the standard cost is $270 per week for the first two boarders and $222 per week for subsequent boarders. If the amount you receive exceeds this, you can still be exempt if the surplus does not exceed an additional allowance for the cost of the housing. From the 2020 year the IRD have reduced this threshold to $186 per week per boarder. The reason why the standard cost threshold has dropped so significantly is that the IRD has removed an allowance for transport that was previously included. If you do incur transport costs and the amount you receive exceeds the $186 per week plus the additional allowance for housing cost, then you can get an additional allowance for transport costs associated with the boarding activity.
In summary, income received from boarders is taxable but there is an IRD ruling whereby you can get an exemption if the income falls below the standard cost threshold. There has been a significant reduction in the standard cost threshold which applies from 1 April 2019 for the 2020 income year onwards. If you provide boarding services, you will need to be conscious of this reduction in the threshold. If you are not eligible for the exemption or voluntarily choose not to apply it, then you work out your actual income and expenditure and include that in your tax return.
Short-term stay occupant
It may be that you rent out the spare bedroom (or two) via Airbnb to short-term occupants. Again, there is an IRD approved exemption which applies if you receive no more than $50 per night and you do not rent out rooms for more than 100 nights per year, counting each room that is rented out separately. If you are getting more than $50 per night, then you have to return the surplus as taxable income or otherwise complete a calculation of the actual expenses incurred. Note that if you rent out multiple rooms and your gross income totals more than $60,000 per annum, then GST also enters the picture here when you are providing short-term stay occupation.
The final type of occupant is a tenant, which in many situations might also be described as a flatmate. If you have somebody living with you and paying rent, but not classified as a boarder, then the amount received is income. There are no standard cost exemptions for a tenant. Instead you need to calculate the actual expenditure incurred in providing the tenant with the accommodation. Usually this means you calculate what proportion of the home you are renting and then claim an equivalent proportion of general costs incurred. Any costs that relate directly to the tenancy can be claimed as deductible. On the other hand, any expenses that relate solely to your private occupation of the home are not deductible.
In summary, it can be a good idea to generate additional income through renting out spare space in your home. However, you need to be conscious of the potential tax implications in doing so. It is important to identify what type of service you are providing, as different rules apply to different occupants. If you have been providing boarding services in the past, you need to be aware of the new thresholds that apply from 1 April 2019, which represent a reasonably significant reduction of the exemption threshold.