Now that summer has come and gone, the ATO has been active in issuing reminders about the taxation issues surrounding holiday homes.

The fact the ATO issues reminders is a sure sign that the topic is continuing to be a concern.

Even though it is still some time before the owners of beach shacks or bush retreats will be making an appointment to see their tax agents, it can only be assumed that the ATO is wary that these taxpayers are most likely expecting to make certain related claims come tax time.

What’s the tax treatment for holiday homes?

If your holiday house is just used by yourself, and your family and friends (that is, it is not rented out), then there is generally nothing to include in your tax return in terms of income or deductions until the property is sold.

But when that time comes, you will need to have kept records of all expenses and outgoings from the time you bought the holiday house until the day it is sold. This will enable us to be able to accurately work out any capital gain (or perhaps loss) when you sell.

However if it has been leased or rented out, the principles that apply to an investment rental property also apply to a holiday house from an income tax point of view. Owners are therefore eligible to claim expenses for the property based on the proportion of the income year when it was rented out or, alternatively, based on when it was “genuinely available” for rent (see breakout below).

What expenses can I claim?

Deductible expenses can include interest on funds borrowed to buy the house, property insurance, an agent’s commission, repairs and maintenance costs (such as materials, mower fuel, council tip fees, trailer hire), council rates, the decline in value of depreciating assets such as a stove, and capital works. Check with us if you want to make sure an expense is eligible for a deduction.

As noted, if you rent out your holiday home, you can claim reasonable costs that relate to you inspecting, maintaining and making repairs to the property. But if you are primarily visiting the property to have a holiday, and while there make repairs or do some maintenance, you generally can only claim repair and maintenance costs based on the proportion of the income year the property was rented out or was genuinely available for rent.  Note also that you cannot claim travel costs to and from the property on such cases.

Don’t forget to apportion for private use

It will be necessary to apportion expenses if the house has been used:

• for private purposes for part of the year – such as when you use it yourself, or allow your family, relatives or friends to use it free of charge
• by family or friends for part of the year and you charge them less than market rent.

So if for example the house is made available to renting holiday makers for most of the year, but you reserve three weeks over an off-peak period to use it yourself, that three week period needs to be ignored when calculating deductions. This also includes use by other family members, relatives and friends.

Example: Private use by owner

James McGill and his partner Kim have a holiday home, which is rented at market rates. They have a real estate agent advertise it for rent during the year. James and Kim use the property themselves for four weeks during the year.

During the year, their expenses for the property are $34,802. This includes interest on the funds borrowed to buy the holiday home, property insurance, the agent’s commission, maintenance costs, council rates, the decline in value of depreciating assets and capital works deductions.

James and Kim receive $25,650 from renting out the property during the year. However no deductions can be claimed for the four weeks they used the property themselves.

James and Kim can claim deductions for their expenses based on the proportion of the income year the property was rented out or was “genuinely available” for rent (more below).

James and Kim’s rental income and deductions for the year are as follows:

Rent received                            $25,650

Rental deductions                    (48/52 x $34,800)                          $32,124

Rental loss                                   ($6,474)

As they are joint owners, they claim a rental loss of $3,237 each in their tax returns.

James and Kim need to keep records of their expenses. If they make a capital gain when they sell the property, the proportion of expenses (interest, insurance, maintenance costs and council rates) that they could not claim a deduction for might in certain cases be taken into account in working out their capital gain.

Special rule for non-arm’s length dealings

If your holiday home is rented out to family, relatives or friends below market rates, your deductions are limited to the amount of rent received for that period. For example, if your holiday house is used by your sibling’s family for a week, and they pay a token $100 for the privilege, even though expenses such as those mentioned above may be calculated to add up to say $200, a claim for expenses is capped at the amount of rent received (that is, $100).

Genuine availability for rental

If the holiday house is really available to be rented out, but you or your real estate agent have simply not been able to attract renters, then the ATO will still generally allow deductions for that property.

However the ATO is wary that some less-than-scrupulous holiday home owners may try to make expense claims for their property while not really intending to rent it out to others.

The ATO has outlined various factors that it believes may indicate that a holiday house is not “genuinely available” to be rented — leaving the property owner ineligible to make expense claims.

Factors that the ATO can be on the lookout for include a holiday house that is:

• advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised at a workplace, by word of mouth, or outside annual holiday periods when the likelihood of it being rented out is very low
• the location, condition of the property, or accessibility to the property, mean that it is unlikely tenants will seek to rent it
• you place unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out – such as:
• setting the rent above the rate of comparable properties in the area
• placing a combination of restrictions on renting out the property – such as requiring prospective tenants to provide references for short holiday stays and having conditions like “no children” and “no pets”, and
• you refuse to rent out the property to interested people who have applied to rent the property without adequate reasons.