If you own a holiday home, you can only claim deductions for holiday home expenses to the extent they are incurred for the purpose of gaining or producing rental income. The ATO outlines the following rules:
Holiday home – not rented out
If you own a holiday home and don’t rent out the property, you don’t include anything in your tax return until you sell it. When you sell the property, you will need to calculate your capital gain or loss. Keep all records from the time you purchase the property until the time you sell it to be able to work out the capital gain or loss when you sell.
Holiday home – rented out
If your holiday home is rented out, you need to include the rental income you receive as income in your tax return. You can claim expenses for the property based on the extent that they are incurred for the purpose of producing rental income.
Holiday home – part rental
You will need to apportion your expenses if:
- your property is genuinely available for rent for only part of the year.
- your property is used for private purposes for part of the year.
- only part of your property is used to earn rent.
- you charge less than market rent to family or friends to use the property.
If you rent out your holiday home and also use it for private purposes, you must apportion your expenses. You can’t claim deductions for the proportion of expenses that relate to your private use or if it was not genuinely available for rent, such as when used or reserved for yourself, friends or family.
If your holiday home is rented out to family, relatives or friends below market rates, your deductions for that period are limited to the amount of rent received.
It may not be appropriate to apportion all expenses on the same basis. For example, expenses that relate solely to the renting of your property are fully deductible and you would not need to apportion them based on the time the property was rented out. Such expenses include:
- real estate commissions
- costs of advertising for tenants
- phone calls you make to a tradesperson to fix damage caused by a tenant
- the cost of removing rubbish left by tenants.
On the other hand, no deduction can be claimed for expenses that relate solely to periods when the property is not genuinely available for rent, used for a private purpose or relates to the part of the property that is not rented out. This would include the cost of cleaning your holiday home after you, your family or friends have used the property for a holiday or a repair for damage you have caused while staying there.
Holiday home – not genuinely available for rent
Expenses will not be deductible for periods when the property is not genuinely available for rent. Factors that may indicate a property isn’t genuinely available for rent include:
- it’s advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised:
– at your workplace
– by word of mouth
– on restricted social media groups
– outside annual holiday periods when the likelihood of it being rented out is low
- it’s advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised:
- the location, condition of the property, or accessibility of the property means that it’s unlikely tenants will seek to rent it
– - you place unreasonable or stringent conditions on renting out the property that restricts the likelihood of renting out the property, such as
– setting the rent above the rate of comparable properties in the area
– placing a combination of restrictions on renting out the property – for example, requiring prospective tenants to give references for short holiday stays and conditions like ‘no children’ and ‘no pets’ placing a combination of restrictions on renting out the property
- the location, condition of the property, or accessibility of the property means that it’s unlikely tenants will seek to rent it
- you refuse to rent out the property to interested people without adequate reasons.
These factors generally indicate the owner doesn’t have a genuine intention to earn rental income from the property and may have other purposes, such as using it or reserving it for private use.
Reference (includes some examples):
https://www.ato.gov.au/individuals-and-families/investments-and-assets/holiday-homes
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2024. Please do not reproduce without the expressed written consent of the author.