What Happens If You Rent Out Part of Your Home?

General information only. This article provides general information for Australian homeowners. It is not tax, legal or financial advice. Renting out part of your home has capital gains tax consequences that depend heavily on your circumstances, so speak with a registered tax agent before you start, and before you sell. Based on Australian Taxation Office (ATO) guidance current at the time of writing.

Renting out a spare room, a granny flat, or a self-contained part of your home can be a smart way to earn extra income. But it changes your tax position in two ways: it creates income you must declare (with some deductions to match), and, the part most people don't see coming, it can cost you part of the capital gains tax (CGT) exemption you'd otherwise get on your home when you sell. The second one is usually the bigger number, so it's worth understanding before you list.

For how rental deductions work generally, see Rental Property Tax Deductions: What You Can Claim in Australia.

The big one: your main residence CGT exemption

Normally, when you sell the home you live in, any capital gain is exempt from CGT under the main residence exemption. The catch: once you use part of your home to produce income, you generally lose the exemption for that part, for the period it's income-producing.

In practice that means when you eventually sell, a portion of your capital gain can become taxable. The taxable portion generally reflects how much of the home was used to produce income (often by floor area) and how long it was used that way.

There's also a rule that surprises people, often called the "home first used to produce income" rule. Broadly, if your home would have qualified for the full exemption and you first start using it to produce income after 20 August 1996, you may be taken, for CGT purposes, to have acquired it at its market value at the date you first rented part of it out. This makes a market valuation at the time you first start renting a genuinely valuable record to have, because it can set the starting point for any future taxable gain. It's a strong reason to get advice (and a valuation) at the start, not at sale.

None of this necessarily means renting a room is a bad idea. For many people the income outweighs the future CGT cost. But you should go in knowing the trade-off and keeping the records to calculate it later.

Income you must declare

If you rent out part of your home at commercial rates, the rent is assessable income and you must declare it. This includes renting to a tenant, and short-stay arrangements (a room listed on a short-stay platform). Genuinely non-commercial arrangements, for example a family member paying token board to cover costs, are treated differently; if you're not sure which side of the line you're on, get advice.

Expenses you can claim (apportioned)

When you rent out part of your home, you can generally claim a portion of your home expenses, the portion that relates to the rented area and period. The usual method is floor area:

• The area used solely by the tenant (their room) — claim the expenses attributable to that area.
• Shared areas (kitchen, bathroom, living areas the tenant also uses) — claim a reasonable share, reflecting shared use.

Apply that apportionment to expenses such as:

• Mortgage interest (the portion relating to the rented area becomes deductible)
• Council rates, water and land-related charges
• Building insurance
• Electricity and gas (where you pay them)
• Repairs and maintenance relating to the rented part
• Depreciation on assets used in the rented area

Some costs that relate only to the rented area (for example, a repair just to that room) may be fully claimable; costs relating only to your private area aren't claimable at all. Keep it reasonable, consistent and documented. The apportionment basis is exactly the kind of thing the ATO expects you to be able to explain.

Note on interest: making part of your home loan interest deductible is a benefit, but it interacts with the CGT point above. Claiming a portion of interest is part of "using your home to produce income", which is what reduces the exemption. Both sides need to be considered together, another reason for advice. See Can You Claim Interest on a Rental Property Loan? for how interest deductibility works.

Granny flats and self-contained areas

A self-contained granny flat you rent out commercially is treated like renting out part of your home: declare the income, apportion expenses, and expect a CGT impact on that portion. (Separately, certain formal granny flat arrangements for older or disabled family members can have their own specific CGT treatment. That's a different situation; get advice if it applies.)

The records that matter most

Because the CGT impact can surface years later when you sell, the records to keep are not just this year's receipts:

• A market valuation of your home at the date you first rented part of it out (potentially important for the cost-base rule above)
• The floor area used to produce income, and the dates it was income-producing
• Your apportionment basis and calculations each year
• The usual income and expense records (rent received, rates, interest, insurance, repairs)
• Records kept for the whole period you own the home, plus 5 years after you sell

ledger.rent gives you a place to record the rented portion, the dates, the apportionment basis and the supporting documents, including the long-life records like the opening valuation, so that when you sell, the information to work out the CGT position is already there rather than lost. It doesn't calculate your CGT or give advice; it keeps the evidence your registered tax agent will need.

Frequently asked questions

See the FAQs below.

Know the trade-off before you list

Renting out part of your home can be worthwhile, but the CGT side means it pays to set up records (and get advice) from the start. ledger.rent helps you capture the rented portion, the dates, your apportionment and the long-life records, and export an accountant-ready summary at tax time.

Start your free trial · View the full deductions guide · Rental property tax checklist

Related: Holiday Home Tax Issues Australian Owners Should Know · Airbnb and Short-Stay Rental Tax Checklist · What Records Should Landlords Keep for Tax Time?

_Last updated: May 2026. Based on ATO guidance current at the time of writing (ATO guidance on renting out part of your home and using your home to produce income). CGT outcomes are circumstance-specific; confirm your position with a registered tax agent._