How to make money from your spare bedroom

Australia is in the grip of a housing crisis.

Renters are squeezed by rising rents, and first-home buyers are locked out by soaring prices, although some relief is in sight, thanks to the Labor government's 2025 policies.

Yet behind closed doors there is a hidden resource... throughout Australia more than 13 million spare bedrooms sit empty. Rooms sitting empty, in a country desperate for housing.

It's a contradiction that cuts to the core of the problem, and a potential part of the solution.

If even a fraction of homeowners were willing to rent out their spare rooms, it has the potential to create a significant pool of affordable housing.

But for many homeowners, the idea remains unthinkable.

The hesitation isn't just an emotional response. Homeowners worry about the impact on their lifestyle, losing their pension or copping a tax bill.

Some feel it's a loss of privacy, others fear it's a financial trap.

Are these concerns justified? And in a housing system under pressure, do the perceived downsides outweigh the very real benefits for renters and homeowners alike?

With the right incentives, clearer tax rules and a shift in mindset, thousands of these rooms could be brought back to life, providing shelter, generating income and even helping buyers get into the market.

The housing crisis: too big to wait

The 2025 Federal election was less a contest of ideology than a referendum on housing. Voters gave Labor a second term with a simple, urgent message: fix housing and fix it fast.

In response, the government rolled out a mix of supply and demand-side measures.

On the supply front: a promise of 1.2 million new homes over five years, $54 million for modular and prefab builds and fresh incentives for apprentices and their employers.

For buyers, the Help to Buy scheme got an $800 million boost, and the First Home Guarantee was extended to allow 5% deposits with no lenders mortgage insurance.

It's ambitious. But even the best policies take time. According to the Australian Bureau of Statistics (ABS), it takes an average of 12.7 months to build a freestanding house. Apartments take closer to three years. And while prefab has promise, it's not yet ready at scale.

Meanwhile demand keeps surging.

The government's own State of the Housing System report predicts supply won't outpace demand until at least 2029. "Relief from the housing crisis is not in sight," says Lyndall Bryant, a property economics researcher at QUT and chair of the Housing Security Research Group.

Her briefing paper, 'The role of older Australians in addressing the housing crisis: spare bedrooms, taxation and the pension', discusses potential solutions to Australia's excess spare room problem.

"If new housing stock is years away, then shifting the focus to existing housing may provide some short-term solutions."

And there's no shortage of homes with space to spare. ABS data shows that around 7.4 million households have one or more bedrooms than they need. An immediate source of housing that's already built and available. TABLE

How did we get here?

It's the legacy of the Australian Dream: the spacious family home on a big block, close to schools, with space for each child and a backyard for the dog.

But the dream was designed for family growth, not for what comes after. When the kids move out, the house doesn't shrink. It becomes an empty nest - an inefficiency in the middle of a housing emergency.

And because the rate of homeownership increases with age, the mismatch grows over time. More than 80% of Australians older than 65 own their home, and three-quarters of those homes have three or more bedrooms, with 84% of them under-utilised.

In most cases, of course, the older we get, the emptier our houses become.

For homeowners in this position, there are usually three options: downsize to something smaller, rent out a spare room, or stay put and make peace with the space. So far, most choose the latter.

A 2024 report by Temple & Webster, Finding the Right Fit, found that Australians with two spare bedrooms were the most satisfied with their living arrangements. Some 77% of those with extra rooms said their home was the "right size" and had no plans to move.

These extra rooms are not sitting idle though. Australian Housing and Urban Research Institute (AHURI) research discovered that spare bedrooms have found new lives as home offices, sewing rooms, storage spaces or gyms. Others are kept ready for visiting adult children, grandchildren or friends.

For many older Australians, these spare spaces are more than practical, there's also an emotional component. A guest room offers the possibility of hosting loved ones. An extra bedroom makes ageing in place safer, allowing space for overnight carers or future needs, which is why decades of government attempts to encourage downsizing have largely failed.

As Bryant puts it: "Various policies to incentivise older people to downsize and release these large homes for younger families are rejected due to a preference to age in place and, hence, the inefficiency persists." See number 1, below, to understand the implications of staying put.

The best way to rent out a room 

If downsizing isn't practical and staying put is stretching the budget, another option emerges: renting out a spare room.

It's a move that could benefit everyone, easing rental pressure, creating low-cost housing options, and helping homeowners unlock extra income.

"An opportunity exists to incentivise older Australians to rent out a spare bedroom," says Bryant. "It could improve access to affordable housing and offer cost-of-living relief to vulnerable older Australians."

But the idea often hits a wall. They've heard the stories that it will affect their pension, or that they'll get hit with capital gains tax (CGT) when they sell - that it's just not worth the hassle.

According to Bryant, however, many of the fears around renting out a spare room are "somewhat of an urban myth". The downsides are often overstated or misunderstood. So, what's really going on?

To rent out a room you need to understand CGT

• CGT is not a separate tax. It's simply the tax you pay on the profit or 'capital gain', when you sell an asset for more than you bought it.
• If you sell shares, artwork or property and make a gain, that amount gets added to your regular income and taxed at your marginal rate. 

There are important caveats.

• If you've owned the property for more than 12 months, you'll only be taxed half the gain. 
• And if the property is your principal place of residence (your main home), it's usually exempt from CGT entirely. That's known as the principal place of residence (PPR) exemption. 

CGT: The practical reality 

Here's the part that trips people up: if you rent out part of your home - say, the spare room down the hall - the full PPR exemption could disappear.

Importantly, you're not taxed on the whole property but just the part that was rented.

The Australian Taxation Office (ATO) looks at three things: how much of the property was used to generate income (including shared spaces such as kitchens and bathrooms), how long it was rented, and whether it was a commercial or domestic arrangement.

That last distinction matters. If you rent out a room and provide meals and shared living, without a lease, it's often considered a domestic arrangement, not a commercial one. So there may be no CGT impact at all. But if the room is advertised and leased, and the tenant pays for their own groceries and utilities, that's counted as generating income - with that comes a tax bill. So how much are we really talking? See number 3.

How renting out a room affects your pension

For many older Australians, this is their biggest fear - that earning income, even a small amount, will reduce or cancel their age pension.

There's a reason for this. As Services Australia states, most types of income count in your income test, including rental income, both commercially and with boarders or lodgers. But again, the rules are more nuanced than they appear.

According to a guide from the Department of Social Services, updated in May 2025, income generated from domestic arrangements is assessed at reduced rates for the age pension (and other pensions). See table below.

Even better, if the boarder is a close family member, the rent may not be counted as income at all. And if there's a mortgage on the home, interest payments can be partially offset by assessable rent.

An example from Allianz Retire+ highlights how this works.

Sally, 60, owns her home but still has a $60,000 mortgage at 6% interest per year. After being made redundant, she begins receiving JobSeeker while looking for work. When her friend, Melissa, needs a place to stay, Sally offers one of her two spare rooms for $300 per week - a total of $15,600 per year. Under Centrelink's income test, 70% of that rent is assessed ($10,920). But because Sally is still paying $3600 per year in mortgage interest, her assessable income from rent is reduced to just $7320.

Future improvements

There's also Work Bonus, a scheme that encourages pensioners to continue working throughout retirement. Bryant says eligible pensioners can earn up to $504 a fortnight ($13,104 a year) without it affecting their pension.

However, the ATO determines 'work' as requiring 'effort', meaning passive income (such as renting out a room) can't be included.

Bryant, however, believes pensioners should also be able to earn $504 a fortnight from passive income without it affecting their pension. "It ought to be easy enough to apply the scheme to rent as well as income from work, as it arguably already does, given that renting out spare bedrooms is a form of self-employment and hence 'work'," she wrote in an article published in The Conversation.

Bryant noted in her policy briefing that no change to the Work Bonus policy would be required for this approach to be implemented.

"A broader understanding of this policy by homeowners receiving the pension would free up much-needed affordable accommodation, while assisting pensioners with cost-of-living pressures."

Not a pensioner?

Capital gains tax isn't just a homeownership issue, it's also a borrowing one. That's due to a significant policy change from Commonwealth Bank, which updated its lending criteria recently to allow up to 
$150 of boarder income per week to count towards a loan application.

Through Commonwealth Bank, home buyers can now borrow more by showing that someone will contribute rent, even before the arrangement has begun.

The change could increase borrowing power by up to $50,000, opening the door for home buyers who may otherwise have fallen short on income.

For first-home buyers, especially those relying on government schemes or family guarantors, it's potentially transformative.

"Think about this," says George Samios, mortgage broker and founder of Madd Loans. "In some cases, you can now pay zero stamp duty, access the first-home buyer grant, and count up to $650 a month towards your mortgage. That could make or break a deal."

It also applies to refinancing. A single parent could now include the $150 a week in board paid by an adult child, increasing their borrowing power for a cheaper interest rate.

Homeowner Ben Donnelly says this kind of policy reflects how people live. "I rented out three rooms to a few mates to help cover the mortgage," he says, thinking back to his first home in 2015. "Forget that the house had no blinds or air con. We were just stoked to have a place. It made a huge difference, but none of that boarder income could actually be used to help with my borrowing capacity."

Fast forward to today and homeowners have that possibility through a major bank. And while Commonwealth Bank's announcement is making headlines, other lenders have been quietly accepting boarder income for years, although with different standards. Newcastle Permanent, for example, will accept 100% of boarder income, if it doesn't come from an immediate family member.

But while the policy shift might help people buy a home sooner, CPA-registered tax agent and mortgage broker Matt Tully says the change could come with long-term costs.

As discussed earlier, the ATO draws a line between domestic arrangements (such as board and lodging, where meals and shared facilities are included) and commercial ones (where a room is rented more formally). Only the latter triggers CGT.

Tully argues that under these lending policies, the arrangement could be considered commercial. And as he explains, "That means you've just given up your full CGT exemption on your owner-occupied home."

Tully stresses that it's not the Commonwealth Bank policy itself that's the issue. "This happens whether you're borrowing or not. But what banks and brokers don't always explain is that CGT is now in play because income is in play."

While it's not the tax equivalent of the life sentence you might have been led to believe it is - the examples before show that there are plenty of ways to reduce your CGT liability - it's worth being aware of the tax consequences of your choices.

The big picture of your decision

"The hardest thing in the world is to understand income tax," Albert Einstein once lamented to his accountant. If even he struggled, what hope do the rest of us have?

Australia's CGT is no exception. The ATO's 666-word guide to CGT exemptions proves that when it comes to tax, the Devil really is in the detail. But here's the thing: understanding what gets taxed and when can empower homeowners and buyers to make more informed choices.

Thankfully, financial advisers are paid to wade through the weedy anachronisms of tax law, so you don't have to. Beyond the financial complexity lies something deeper: the emotional weight of sharing 
a home that holds a lifetime of memories. Myriad considerations arise.

As Bryant highlighted in The Conversation, Australians renting rooms need legislated protections from elder abuse and spurious claims of cohabitation and other rights.

"Tenant matching and management systems could make the process simpler." Housing markets don't operate in a vacuum. They are driven by choices, whether deliberate or passive. Whether it's downsizing, renting out a spare room or holding tight, every decision - or lack thereof - shapes how we live.

But in a country facing a housing crisis, the question isn't just whether empty nesters should reconsider their options. It's about what will motivate them to fill their empty rooms and, in doing so, help reshape the future of housing.

1. Cost of an empty nest

Staying put comes with trade-offs. This is where Australia's housing crisis collides with the cost-of-living crisis, according to QUT's Lyndall Bryant. She says many older homeowners are "asset rich but income poor". They have valuable homes but not enough income to live comfortably.

With 80% of older Australians relying on the age pension and a quarter living in poverty, according to the Australian Human Rights Commission, it's easy to see how homeownership can mask hardship.

A 2021 UTS study found high rates of energy poverty, food insecurity and social isolation among older Australians. Where they lived played a big part in the results.

More than one in four Australians 60 years and older experiences some degree of loneliness, according to a recent analysis published by The Medical Journal of Australia. It goes on to say that loneliness and social isolation are linked to heart disease, stroke, diabetes, dementia and depression.

We're dealing with two truths: Australians want to stay in their homes and many of them, especially older ones, are quietly suffering - physically and financially - because of the choice they make.

2. Downsize your house, upsize your super 

If you're older than 55 and own your family home, there's a generous incentive to boost your retirement income, even if you're no longer working. The downsizer contribution allows eligible homeowners to contribute up to $300,000 per person from the sale of their home directly into super. That's up to $600,000 per couple, provided both are older than 55 years.

"A key advantage is that downsizer contributions don't count towards your annual non-concessional contribution cap, which is currently $120,000 for most people," said Sophie McRae, a financial adviser from TelstraSuper, on the Friends With Money podcast. "But there are eligibility rules around ownership, and timing you need to meet."

It's a compelling offer, but one few take up.

According to Australian Seniors' research, almost 70% of empty nesters have no intention of downsizing, a move that would free up larger homes for larger families.

Just 19% moved to a smaller home after their children moved out, while 13% say they're considering it.

3. Formally rent out a room 

Take this example provided by tax accountant and mortgage broker Matt Tully. You buy a two-bedroom unit for $500,000. Five years later, you sell it for $700,000, so you've made a $200,000 capital gain.

While you owned it, you rented out one of the bedrooms on commercial terms, and the tenant also used shared areas. In this case, half the floor space was effectively rented, so half the gain ($100,000) is subject to CGT.

Because you owned the property for more than 12 months, only half of that ($50,000) is taxable.

If your overall income for the year is high, say more than $190,000, you'll pay tax at the top marginal rate of 47% (the highest rate of 45% plus the Medicare Levy). That's $23,500. At lower incomes, it could be significantly less.

Yes, it's a cost, and a big one, especially if you're unprepared for the hit. But over those five years, you could have earned $300 a week, or $15,600 a year, in rental income. That's $78,000 in total. Much of it is also tax-deductible, if you claimed home-related expenses such as utilities, maintenance and council rates.

There are also situations where homeowners won't need to pay CGT on a spare room, even if they've rented it out.

If you bought your home before September 20, 1985, congratulations, you own what the tax office calls a 'pre-CGT asset'. No tax is payable even if you've been renting the spare room for decades. In many cases, the homeowner still comes out ahead.

4. Accommodating a boarder 

QUT's Bryant outlined another example in her brief: "A pensioner has owned their family home since 1999 and rents two spare bedrooms providing board and lodging for local apprentices for the past 10 years, earning $300 a week," the brief said.

"As a domestic arrangement, the $15,600 income earned per annum is not taxable and no CGT liability exists."

In these cases, the rent can't be claimed as income and expenses can't be deducted, but the upside is tax simplicity.

Some might say that's a fair trade.

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