Do you own a holiday home? Understanding how deductions work for expenses related to holiday homes is crucial.
As a holiday homeowner, you can claim deductions for expenses incurred in generating rental income from your property. However, it’s essential to be mindful of the specific scenarios where deductions may need adjustment.
Rental income and expenses
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.
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 deductions
When it comes to claiming deductions, it’s important to note that you can only claim expenses for periods when your holiday home is genuinely available for rent. If you’re using the property yourself during peak rental periods or imposing restrictive conditions that limit its rental potential, deductions should be appropriately reduced.
Here are some questions to consider while determining the validity of your claimed deductions:
- Usage duration: How many days did you use the property for personal reasons during the year? Remember, deductions can’t be claimed for periods of personal use.
- Rental advertisement: How and where do you advertise the property for rent? Ensure your advertising methods align with market standards to validate your deductions.
- Property condition: Will any restrictions or property conditions deter potential renters? Deductions may be affected if the property isn’t maintained in a rentable condition.
- Property accessibility: Is any part of the property inaccessible or reserved for personal use? Deductions should relate only to the rentable portions of your holiday home.
By ensuring your claims align with the rental income generation and property usage, you can confidently leverage your entitlements while staying compliant with tax regulations. Additionally, when your holiday home isn’t rented out, specific considerations apply regarding capital gains or losses upon its sale.
Understanding the nuances of claiming deductions for a holiday home, whether rented out or not, is crucial for accurate tax reporting. For a comprehensive understanding of your entitlements and tax implications regarding your holiday home, contact our KMT tax adviser for assistance.
Source: ATO
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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 seek tax advice from a qualified accountant at KMT Partners. Information is current at the date of issue and may change.
