Owning a holiday home can be a great way to enjoy time away from home or earn some extra income. Understanding your tax obligations is important when renting out your holiday home. The Australian Taxation Office (ATO) sets different rules for claiming expenses and declaring income based on the property’s use. This is categorised between personal holidays, occasional renting, or as a short-term rental business. How you use your property will determine the specific tax requirements you must follow. Let’s break down some common scenarios.
What if you don’t rent out your holiday home?
If you own a holiday home that you don’t rent out at all, you generally don’t need to include anything in your tax return each year. However, it’s still a good idea to keep records of expenses like maintenance, insurance and rates payments. These can help reduce your capital gains tax if you sell the property in the future. When that time comes, you’ll need to calculate your capital gain or loss based on the original purchase price versus the sale price. Having those expense records on hand makes the process much easier.
When you do rent out your holiday home on occasion
Now, if you do decide to rent your holiday home out, things get a bit more complicated tax-wise. In this case, you’ll need to declare any rental income you receive. The good news is you can usually claim deductions to help offset that income. Expenses like agent commission fees, advertising costs, repairs and maintenance are all deductible. They need to relate directly to earning rental income.
However, there are some limitations. When you use the property for personal stays during the year, it’s necessary to apportion your expenses between the periods of genuine rental availability and private use. This split is essential to accurately reflect the property’s dual-purpose in your tax calculations. The same goes if you only rent it out seasonally. You also can’t claim deductions for periods when the property isn’t genuinely on the rental market. For example if you reserve it for family use.
Make your property genuinely available to rent
To stay on the right side of the ATO, it’s important your property is genuinely available for rent throughout the year. Factors like only advertising locally, setting unrealistic rent prices, or placing unreasonable conditions on tenants can indicate the property isn’t a legitimate rental business. In those cases, deductions may be limited or denied.
Some other things to watch out for – if you rent to family or friends at below-market rates, deductions are capped at the actual rent received. And expenses relating solely to private use, like cleaning after a family stay, are never deductible.
Eligibility of claiming tax deductions on your holiday home
There are a few factors the ATO looks at to determine genuine availability. For example, if the property is only advertised through limited channels like your workplace or social media groups, rather than wider platforms, this restricts potential tenants and shows less intent to maximize rental income.
High rent or restrictions
Setting the rent much higher than comparable properties in the area, or placing unreasonable conditions like banning kids and pets, can also indicate the goal is private use rather than attracting tenants. Only listing it during off-peak periods when rentals are unlikely, further limits genuine availability.
Even the location and condition of the property comes into play. If remote access or disrepair make it an unappealing rental option, this suggests the priority is owner enjoyment over deriving income.
Refusing reasonable rental inquiries without proper cause. For example, declining families with young kids even when the owner’s family brings their own kids each year.
Failing to properly maintain or update the property to a standard that would appeal to tenants over private owner enjoyment.
Combination of criteria
By combining several of these limiting factors, like high prices plus pet restrictions plus off-season periods only, it becomes clear the property isn’t running as a legitimate business endeavor open to all-comers year-round. The ATO views this as reserving it for private purposes rather than actively pursuing rental income opportunities.
So, while occasional owner use may still allow some deductions if properly balanced with genuine marketing, holiday home owners need to demonstrate real efforts attracting tenants to the widest possible pool to satisfy the ATO’s standard of genuine rental availability.
Essentially, if the ATO sees the owner has not made a genuine effort to maximize rental opportunities and income throughout the year, deductions may be reduced or denied entirely on the basis the property is not a bona fide business undertaking. Clear and responsive communication with any real estate agents managing bookings can also help demonstrate legitimate rental intentions when you rent your holiday home out on occasion.
Acceptable example of claiming expenses when renting out your holiday home
Sally and Mark own a beach house near Byron Bay. They rent it out during the peak summer months from December to February when demand is high. But they also use the property themselves for 2 weeks in July and 2 weeks over the Easter long weekend when few rentals are booked.
In the financial year, Sally and Mark receive $12,000 in rental income. Their total expenses are $30,000, which includes interest, insurance, rates, repairs and a cleaning service.
To work out their deductible expenses, they take the number of weeks rented (20) divided by the total weeks in the year (52). So, their deductible proportion is 20/52 or 38.5% of expenses.
38.5% of their $30,000 in expenses is $11,550. Their net rental income is then $12,000 (rental income) – $11,550 (deductible expenses) = $450.
If they didn’t apportion expenses, they may have claimed the full $30,000 and reported a loss, which isn’t accurate given their private use of the property as well.
With careful record keeping and understanding the ATO’s stance on genuine rental intentions, owning a holiday home can be a tax-effective way to enjoy your investment. Just be sure to claim only what you’re entitled to based on your individual circumstances. And if you have any questions, your tax advisor can help navigate the rules. Overall, being transparent and having supporting documentation is the key to staying on the right side of the tax man when it comes to your holiday home.