Tax deductions for holiday homes – What you need to know

If you own a holiday home, you can only claim tax deductions for expenses to the extent the home is rented out or genuinely available for rent.

Even if you don’t rent out your holiday home, there are capital gains tax implications when you sell it.

ATO targets dodgy deductions for holiday homes  

You can only claim deductions for the periods the property is rented out or is genuinely available for rent. Periods of personal use can’t be claimed.

The ATO regularly finds evidence of home-owners claiming deductions for their holiday pad on the grounds that it is being rented out, when in reality the only people using it are the owners, their family and friends, often rent-free. So they are keeping a close eye on holiday homeowners who don’t genuinely try to rent out their property.

Rental property claims were high on the ATO’s hitlist for 2022-23 as it attempted to reduce the tax gap – the difference between what is collected and what full compliance would yield.

“Expense claims running to thousands of dollars for occasionally rented holiday homes fail the pub test and will fall foul of the ATO’s crackdown on property deductions”, says assistant commissioner Kath Anderson.

It’s important to understand what is a valid rental deduction and what’s not. 

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.

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.

For information on how to apportion expenses, see the examples in Holiday home – part year rental.

Holiday home – not genuinely available for rent

Expenses may be deductible for periods when the property is not rented out if the property is 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 very low 
  • The location, condition of the property, or accessibility of the property mean that it’s unlikely tenants will seek to rent it
  • You place unreasonable or stringent conditions on renting out the property that restrict 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’ 
  • 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.

Part-year rental

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.

If you have a rental property in a commercial residential property, it’s treated like other residential rental properties. You’re not liable for GST on related income and can’t claim GST credits for related purchases. While commercial residential premises are generally subject to GST, an individual apartment doesn’t, by itself, have the characteristics of commercial residential premises. see Holiday apartments in commercial residential properties.

Source: ATO website, Accountant Daily

Read also: Tax implications of Christmas party

Talk to our KMT tax adviser if you need assistance with your tax deductions for holiday homes!

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or get professional advice from your accountants at KMT Partners.