Owning a Holiday Home: Tax and Deductions

Whether you own a holiday home solely for personal use or rent it out to others, there are crucial tax considerations to keep in mind. Understanding the implications of owning a holiday home in relation to your tax obligations can significantly impact your financial planning.

Holiday Home: Not Being Rented

If you own a holiday home and it isn’t rented out, you won’t need to report anything on your tax return until the property is sold. However, when you do sell, calculating the capital gain or loss will be necessary.

It’s essential to maintain meticulous records from the time of property purchase until its eventual sale. These records are crucial for accurately determining the capital gain or loss upon selling the property.

Holiday Home: Being Rented

Should you decide to rent out your holiday home, the rental income received becomes taxable and must be reported in your tax return. However, you can also claim expenses related to the property, provided they are directly linked to generating rental income.

Expenses for the property can be claimed based on the proportion in which they contribute to producing rental income. However, apportioning expenses becomes necessary under specific circumstances:

• When the property is genuinely available for rent only during certain periods.
• If the property is used for personal purposes during specific times.
• When only a part of your property is utilized for rental purposes.
• In cases where you charge below-market rent to family or friends using the property.

Certain expenses are fully deductible when they solely relate to renting out the property, such as real estate commissions, advertising costs for finding tenants, or expenses incurred due to tenant-related damage.

However, deductions cannot be claimed for expenses incurred during periods when the property is not genuinely available for rent or when used for personal reasons. For instance, expenses related to cleaning the property after personal use or repairing damage caused during personal occupancy are not deductible.

Determining Genuine Availability for Rent of a Holiday Home

When considering whether expenses for periods of non-rental can be deductible, it hinges on the property’s genuine availability for rent.

Factors indicating a lack of genuine availability for rent encompass several aspects:

• Limited Advertisement Exposure: If the property is solely advertised in limited settings, like exclusively at your workplace, through word of mouth, within restricted social media groups, or outside peak holiday seasons, it might limit its visibility to potential tenants.
• Property Characteristics: Factors like location, condition, or accessibility may influence tenant interest. If these aspects are unfavourable, it might reduce the likelihood of attracting tenants.
• Rental Conditions: Imposing unreasonably stringent rental conditions, such as setting rents higher than comparable properties, or applying a combination of restrictions (like demanding references for short holiday stays or specifying ‘no children’ or ‘no pets’), can restrict the property’s rental potential.
• Refusal without Reason: Refusing interested individuals without valid reasons might indicate motives beyond earning rental income, suggesting possible use for personal reasons or reservation for private use.

These indicators often suggest that the property owner might not genuinely intend to generate rental income from the property. Instead, they might have other purposes, such as personal usage or keeping it reserved for private use.

Illustrative Scenario: Property Advertised at Excessive Rent

Consider Tom, who owns a holiday home and engages a real estate agent to promote the property for rent. Comparable properties in the same area are renting at $1,000 per week. However, Tom decides to advertise their property at an inflated rate of $3,000 per week or $430 per night.

Throughout the year, the property remains unoccupied as no one rents it. Tom maintains the high rent without making adjustments and uses the property exclusively for personal holidays.

In this case, it becomes evident that Tom’s property isn’t genuinely available for rent. The intention here isn’t primarily to generate rental income but rather to reserve the property for personal use. Consequently, no deductions can be claimed for expenses related to this property.

Tom should maintain detailed records of expenses. If a capital gain is realized upon selling the property, the expenses incurred (such as property insurance, interest on funds borrowed for the purchase, repair costs, maintenance, and council rates) will be considered in calculating the capital gain.

Managing Expenses for a Part-Year Rental Holiday Home

When your holiday home serves both as a rental property and for personal use, it’s essential to allocate expenses accordingly. Deductions cannot be claimed for the portion of expenses linked to your private use or if the property wasn’t genuinely available for rent, especially when utilized or reserved for personal purposes, including use by yourself, friends, or family.

Furthermore, if your holiday home is rented out to family, relatives, or friends at rates below the market value, your deductions for that period are restricted to the actual amount of rent received.

Illustrative Scenario: Balance Rental and Personal Use

Consider Mia and Sam, joint owners of a holiday home rented out at market rates to holidaymakers. They enlist the help of a local property manager to advertise and oversee the property’s management. Although considering long-term leasing, they find greater profitability in short-term rentals.

Their property is available for rent during all holiday periods, including weekends, school breaks, and festive seasons. However, Mia and Sam also use the property themselves for three weeks during off-peak times when tenant occupancy is less likely.

Throughout the year, their expenses for the property amount to $30,000. This includes agent commissions, advertising costs, interest on funds used to purchase the property, property insurance, maintenance, council rates, depreciation of assets, and capital works deductions.

They earn $20,000 from renting out the property during the year. They can claim the full amount for agent commissions and advertising ($1,500) as a deduction. However, the remaining expenses incurred by Mia and Sam ($28,500) can be claimed based on the proportion of time the property is rented out or genuinely available for rent. No deductions are applicable for the three weeks they use the property themselves.

Breakdown of Mia and Sam’s rental income and deductions:

• Rental income: $20,000
• Rental expenses (($28,500) – proportionally calculated for the time rented) + $1,500 = $29,000
• Resulting rental loss: $20,000 − $29,000 = ($9,000)

As joint owners, Mia and Sam each claim a rental loss of $4,500 in their respective tax returns.

It’s vital for Mia and Sam to maintain detailed records of their expenses. Should they realize a capital gain upon selling the property, expenses not claimed as rental deductions due to their personal use of the property will be considered in determining the capital gain.

Feel free to reach out to a member of the MaxGrowth team for further discussions on 02 9267 4468 or [email protected]