If you’ve got a couple of spare rooms, renting them out is a great way to make some extra cash. However, how you rent them out can make all the difference and can even be the difference between paying a large tax bill and no tax at all. It all comes down to whether you are renting to a boarder or flatmates. therefore, we’ve drawn up this quick guide to give you a run-down of the key facts you need to know.
What Is A Boarder?
A boarder gets a lot more than just a room. Generally, the boarder pays a fixed amount each week. This covers the room, power, phone, internet and all other overheads as well as food. The food provided might be all breakfasts and dinners with lunches sorted by the boarder at work or school. It just has to be more substantial than snacks or morning tea. The bills and food are all covered by the fixed weekly payment, not split like they would be with a flatmate.
You have an international student staying with you for a semester. The student is paying you $250.00 per week. This covers their room, three meals a day, power, internet and use of the rest of the common areas in the house with all furniture provided. Regardless of fluctuating power and grocery bills, the student pays the same weekly amount. Therefore, this international student is your boarder.
What Is A Flatmate?
A flatmate is not the same as a boarder. A flatmate generally rents a room, furnishes it with their own furniture and then pays a share of the other bills like power and internet. Flatmates can share food costs or split the grocery bill but unlike with boarders, there is not one person providing all of the food and preparing the meals as a part of the weekly rent.
You rent a three bedroom house. You have a spare room so you get in a friend to help share the costs. They pay a third of the rent, power and phone. You all split the grocery bill and take turns cooking dinner. Your friend is your flatmate, not your boarder as you are not providing all of their meals for them and they are paying utilities on a variable split basis rather than all included in the one weekly charge.
How Do I Rent Out My Rooms And Pay No Income Tax?
If you are renting to flatmates, you will have to apply the actual cost method and declare all income and deduct a portion of all overheads. If you have a heavily leveraged house (large mortgage) then this may result in a loss. From April 2019, this loss is not tax deductible so will not result in any refund but will also not trigger any tax liability. The loss will be ring-fenced and carried forward to apply against any future profits from the rental.
If you are renting to boarders, you may be able to completely avoid any tax liabilities or obligations on the income. As long as your boarder rent is below the maximum standard cost, as calculated by the IRD, then you can earn that board and pay no tax on it. If you have a house with very low overheads (low or no mortgage) then this can be a profitable enterprise. The boarder income thresholds are outlined in the section below.
Based on the below standard cost method, you could rent out three rooms to boarders and earn $750.00 a week ($39,000.00 per year) completely tax-free.
Boarder Income Thresholds
The IRD annually calculates the national average standard cost for running a household. This standard cost takes into account the cost of food, heating, power, transport and includes an amount for outgoings such as rates, insurance, mortgage interest cost, and repairs and maintenance.
- First Boarder
- Second Boarder
- Third Boarder
- Fourth Boarder
- Standard Cost (per week)
- Total (per week)
The above standard cost rates are for the year ended 31st March 2018. The IRD will publish inflation adjusted figures for each financial year so keep an eye on your changing tax-free threshold regularly.
If you have five or more boarders you are unable to use the standard cost method. You must us the actual cost method and return all income received in your IR3. You will need to keep records for all income declared and expenses you deduct.
Hopefully you have found this quick guide helpful. If you would like to have a more in-depth discussion about your options, feel free to get in touch with the team at MBP for a free consultation.
This advice is general in nature and should not be relied on as a recommendation. The information was accurate at the time of publication but may now be out of date. Every situation is unique and requires tailored advice. Get in touch for a free consultation by emailing firstname.lastname@example.org or call us free on 0800 86 85 86.