Watch for tax pitfalls when taking in boarders
It seems that some cash strapped families are listing their spare rooms on rental websites like Airbnb.com or 9flats.com, which help you to rent a room in your home for short periods to make some extra cash.
Lost privacy and the possibility of choosing a noisy or messy tenant mean that taking in boarders isn't likely to be everyone's first choice. But taking in students, overnight travellers, or airline employees looking for a "crash pad" can work, particularly if you've had kids of your own.
Be careful though. As soon as you rent out part of your home, you've changed the use of that part from your primary residence to a rental property, the folks at Turbo Tax advise.
Accordingly, during the time that you own and rent out space in your home, you'll need to claim that rental income on your tax return. You'll also have to let your insurance company know that things have changed a bit.
You can claim proportional expenses — such as taxes, insurance, minor repairs and maintenance and interest expenses — incurred to earn that rental income though.
When you sell your home or stop renting a portion of it, you may be required to report a corresponding capital gain. To avoid paying significant capital gains, Turbo Tax suggests:
- Ensure that the rented area of your home is small, relative to the rest of your home.
- Avoid making significant structural changes to your home to create the rental space.
- Don't claim capital cost allowances on the rented area in the first place.
Have you ever rented out space in your home? How did things work out?
By Gordon Powers, MSN Money