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Holiday home tax deductions

Own a holiday home that you also rent out? Find out how much of the property’s expenses you can and can’t claim as a tax deduction…

In this naturally beautiful country that is Australia, it is the dream of many of us to own a holiday home – be it a beach shack, rainforest villa or mountain cottage.

Think about it. A holiday home would be a guaranteed place to escape to during the holidays. It could also be rented out when not in use – thus becoming another income stream.

But since they double as both a holiday home and a rental property, some owners are unclear about how much of the property’s expenses they can claim as tax deductions. According to the ATO, many are claiming back too much.

Assistant Deputy Commissioner of the ATO Adam Kendrick said they had discovered instances of taxpayers claiming higher than expected amounts for their “rental properties” when compared to their reported rental income.

“We know that it can sometimes be challenging for rental property owners to work out what deductions they can and cannot claim on their holiday homes,” he said.

“As part of our prevention before correction approach we are sending letters to taxpayers in approximately 500 postcodes across Australia, reminding them to only claim the deductions they are entitled to, for the periods the holiday home is rented out or is genuinely available for rent.”

So if you claim back too much on your holiday home, the ATO will chase you up.

Save the ATO some effort this tax time and be sure to find out how much of your rental property’s expenses you can actually claim back.

What can be claimed?

Just so we’re clear, when we claim allowable deductions, we’re essentially asking for these expenses to be subtracted from our taxable income to reduce the amount of money the tax rates are applied to. In turn, this reduces how much tax we pay.

For rental properties, tax deductable expenses include:

  • Interest on the loan for the property
  • Property insurance
  • Agent’s commission
  • Maintenance costs
  • Council rates
  • Decline in value of depreciating assets
  • Capital works (construction costs)

You can also claim travel expenses to the property so long as the visit was strictly for inspecting, maintaining and making repairs to the property; not for leisure.

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How much can be claimed back?

The amount you can claim back from expenses on your rental property depends on how much the dwelling is actually treated as a rental property as opposed to a holiday home.

This takes into account a range of conditions including whether it is genuinely for rent, how much it is used as a “holiday home”, and if it is rented out to friends/family at discounted rates. Let’s look at these conditions.

Genuinely for rent:

Some people may not want to have their holiday home rented out but still want to claim tax deductions on the expenses. As such they may advertise it for rent so as to claim it as a rental property, but deliberately advertise it in a way that will prevent people from ever staying there. Thus the property is not genuinely for rent.

The ATO has clocked onto this tactic, ruling that holiday homes not genuinely available for rent can’t have any expenses claimed. The factors the ATO look at to indicate if a property is not genuinely available for rent include:

  • Not advertised properly (e.g. only advertised by word of mouth or only advertising outside annual holiday periods)
  • The location, condition, or accessibility to the property prevents anyone from renting it.
  • Unreasonable conditions (e.g. Rent far too high, unfair restrictions like “no children”)
  • Refusing to rent out to interested people without proper reason.

How much it is used as a “holiday home”:

If the property is rented out and used privately by property owners, the proportion of ‘private use versus being rented out’ in the year is used to work out how much of the expenses are tax deductible.

Example:

Say a beach house is rented out all year except around Christmas when it is used privately for four weeks, with tax deductible expenses totalling $30,000 that year. The amount that could be claimed back would be 48/52 multiplied by $30,000 = $27,692. So, only the proportion of expenses incurred on the property as a “rental” can be claimed.

 

Likewise, if the property is only rented out 4 weeks in a year and used privately during the rest, only one thirteenth (4/52) of the property’s expenses are tax deductable.

 

If it is rented out to friends/family at discounted rates:

If a property is rented out to relatives/friends at a rate where the rent received for that time is less than the expenses over that period, not all expenses can be claimed. Only deductions equal to the amount of rent earned during this period can be claimed.

For example, say the market rental rate for a mountain cottage you own is $800 per week, but you let a friend use it at $200 a week for three weeks. Annual tax deductable expenses for the cottage come to $20,000. In this scenario you can only claim up to $600 worth of the expenses, thus missing out on the full deduction of $1,154 – the expenses on the property over that period (3/52 multiplied by $20,000).

However, if you’d charged $400 a week instead, you would be able to claim the full $1,154 worth of expenses because the rent earned for those three weeks ($1,200) is more than the expenses.

Selling the property

Finally, it is important to note that when selling the property for a profit, the eligible expenses that previously couldn’t be claimed (against tax) are taken into account in working out the taxable capital gain. So, it is important to keep record of all of the property’s expenses.

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