Tax Implications of Renting Out Renovation or Extension?

Chris17 on 01/11/2025 - 22:30
Last edited 01/11/2025 - 22:30

I’m going to raise this with my accountant in January when I file my taxes, but does anyone have experience building a home extension to rent out?

We’ll probably be adding a couple of rooms to our house and may offer one as a rental, either as an AirBnB or to the local hospital for student nurses and doctors. It’ll be a self-contained room with en-suite, kitchen area and its own entrance.

This may mean that part of the renovation will become tax deductible. Obviously I want to minimise my tax bill without breaking the law. How have people dealt with this? Do you get the builder to itemise everything used in the renovation or construction of the rental part?

Financial Taxation

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  • MS Paint on 01/11/2025 - 22:50
    +2

    Tax Implications

    Is there land tax implications? Income tax implications.

  • JIMB0 on 01/11/2025 - 23:05
    +3

    If there's a profit motive you'll be subject to income tax as well as capital gains tax on that portion of the property.

    • Chris17 on 01/11/2025 - 23:26
      -4

      The income tax is a given, though I imagine it could get fiddly figuring out the CGT component.

      I like the idea of part of my renovations potentially becoming tax deductible. I’m just not sure how the ATO will determine (or is even able to determine) which expenses would be claimable.

      • original15 on 02/11/2025 - 09:16
        +1

        Of course you like the idea of renovations being deductible
        Not a tax agent or accountant but reckon this is a long shot.
        If it wasn’t your PPOR sure
        But given it is, and it’s not like an existing granny flat you’d be renovating thats available to rent now, I reckon this shifts more to the unlikely than likely ok side of the scale

        • Chris17 on 02/11/2025 - 12:26

          Fair enough. Thanks.

      • Muppet Detector on 02/11/2025 - 14:53
        +1

        like the idea of part of my renovations potentially becoming tax deductible. I’m just not sure how the ATO will determine (or is even able to determine) which expenses would be claimable.

        I think that you will find that the actual building/renovation will be classified as capital expenditure.

        As for tax deductions, the basic formula will look something like "entire property is 40 m2, deriving revenue from 10 m2" meaning that 1/4 will be in the running for tax deductions where relevant.

        If it's not facilitating a stream of revenue, it won't be subject to tax deduction considerations.

        Some stuff falls under capital expenditure, some will attract a set depreciation schedule and some will become instant total claimable.

        One area to exercise caution is if seeking finance, ensure transparency with intended use. Sometimes finance for PPOR is different to that for IP purposes. Insurance implications too.

        Might be helpful to finding out if granny flat provisions affect you and see how the six year cgt rule works for you.

        Obviously, when building, think about separate infrastructure for billing of utilities and work out what your legal requirements are for relevant standards.

        • Chris17 on 02/11/2025 - 15:18
          -3

          Thanks for the response. I’m sure my accountant will tell me something similar when I finally sit down with him. I’ll pay for the extension in cash, which will at least remove the financing complication.

          I’d probably offer the room with utilities included - and hope they’re not mining crypto from a server farm 24 hours a day. Separate utility billing looks expensive to set up. We’re in Victoria, so tenants are entitled to a food preparation area, AC and a window.

          • Muppet Detector on 02/11/2025 - 16:30
            +1

            @Chris17: If you're just renting out part of your PPOR, you need to work out if you're offering rental or boarding. Different rules and laws apply and from what I understand, Victoria has the strictest ones. Determines whether you can collect bond etc, what you must provide (and when), what the actual agreement has to look like etc, lots of variables, even occupancy levels/periods of vacancy, rental increase periods, termination/eviction requirements.

            Another thing to consider is determining what market rate is. If it is determined that you're charging under "fair market rate", this has bad tax outcomes too. Not sure if total exclusion of deductibles, but definitely some limitations. Insurance implications too.

            For something that seems like it should be simple, it gets pretty complicated and apparently Victoria is the hardest of all.

            • Chris17 on 02/11/2025 - 17:47

              @Muppet Detector: Thanks again. You raise lots of valid points. I’ll be talking to the REA who manages my IP. The ‘bungalow’, while connected to the house, will effectively be self-contained with its own entrance. I’m sure my home insurers will want to have their say, too.

              Medical student accommodation, arranged through the hospital, was going to be our first preference. It’s a direct agreement with the hospital and you can turf them out relatively easily.

              If it were a free-market rental, we’d do it at arm’s length through an REA. We’d never go down the road of a private lease or boarder agreement.

              I understand that all these rules are designed to protect renters, but the result is a counter-productive reduction in overall rental stock.

              Worst case scenario, I’ll just stick our oldest daughter there once she becomes an unruly teenager. We’ll put a hatch in the door for sandwiches.

              • Muppet Detector on 03/11/2025 - 04:42
                +1

                @Chris17:

                I understand that all these rules are designed to protect renters, but the result is a counter-productive reduction in overall rental stock.

                Funnily enough, they are also designed to protect the landlord as well.

                Just off the top of my head, the latest smoke detector laws seem pretty full on, but by making them so strict, if something does go wrong, it limits how much legal and financial exposure the landlord may face.

                I imagine that it is a delicate balancing act that govts must traverse to best serve all sectors of society.

                • Chris17 on 03/11/2025 - 09:39
                  +1

                  @Muppet Detector: Too true. If you seem to be annoying everybody, you’re probably governing well.

      • JIMB0 on 02/11/2025 - 14:56
        +1

        You're just going to create a big muddled mess by mixing business and private. Are you sure its going to be worth the headache?

        • Chris17 on 02/11/2025 - 15:19

          Yep - that’s the million-dollar question! It may not be worth going through with. We’re thinking of targeting students at the local hospital rather the general renting public.

          A solid chat with my accountant is unavoidable at this point.

  • tenpercent on 01/11/2025 - 23:09
    +1

    Are there tax implications if the tenant house-extension-sitter gifts you Apple Gift Cards?

    • MS Paint on 01/11/2025 - 23:15
      +1

      Yes. You can only use them to purchase online for delivery and not in store once added to a wallet. This will delay using your new iPhone 17 by 3 days and cause inexplicable personal taxing pain as you will be the last person in your "friend" group to have a silver 256gb iPhone 17.

      Sauce source

  • payless69 on 02/11/2025 - 04:49
    +3

    We got illegal Airbnb on both sides, The council has confirmed to me via email that they are 100% illegal.

    But a year later and some ex council person indicated to me that their complaints are filtered and statistics modified.

    At one stage council even wanted me to pay for the excess of water used next door.

    Have fun!!!

  • Chris17 on 02/11/2025 - 08:20
    -7

    Well there you go. I’ve just figured out how to create a weirdo magnet.

    If any sane, knowledgeable person out there has something relevant to contribute, I’m all ears.

    • freefall101 on 02/11/2025 - 12:45
      +1

      Former tax accountant here, very knowledgeable on the subject.

      My contribution is that you've been here almost 10 years and yet still somehow assumed this would be a better place to ask than the ATO forums or your accountant themselves.

      Just call your accountant and ask. It's kinda their job to know.

      • Chris17 on 02/11/2025 - 13:20

        Accountant is away till late November - but thanks for the advice.

  • activ8newbs on 02/11/2025 - 11:04
    +1

    I think the renovations won't be tax deductible and worse still I believe the renovations won't be added to the cost base to reduce your capital gains because it's all on one title. I could be wrong

    • Chris17 on 02/11/2025 - 11:15

      Thanks. This is clearly something for an accountant to chew over.

  • Stealtho on 02/11/2025 - 13:25
    -1

    Do what everyone else does and make them put cash under the door.

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