As the traditional holiday period approaches, many individuals head to their holiday properties to spend time with family and friends, or allow loved ones to make use of the property. Owners who claim deductions for holiday home costs need to be careful. If a holiday property is not genuinely available for rent, deductions for expenses may be denied by the ATO.
When is a holiday property genuinely available for rent?
According to the ATO, several factors may indicate that a property is not genuinely available for rent.
Advertising and exposure to tenants
If a property is only advertised by word of mouth, at a specific workplace, on restricted social media groups, or only outside peak holiday or school holiday periods when demand is low, this may limit exposure to potential tenants.
Location, condition and accessibility
If the location, condition or accessibility of the property makes it unlikely that tenants would seek to rent it, the ATO may conclude the property is not genuinely available for rent.
Unreasonable rental conditions
Placing unreasonable or overly restrictive conditions on renting the property can also be an issue. Examples include charging rent well above comparable properties in the area, requiring references for short holiday stays, or imposing conditions such as no children or no pets.
Refusing interested tenants
Refusing to rent the property to interested parties without adequate reasons may also suggest the property is not genuinely available for rent.
While some of these factors, such as charging above-market rent, may be familiar to many holiday home owners, others can come as a surprise. For example, limiting availability to periods outside peak holiday seasons, or banning pets in areas where this is common, may put deductions at risk. This is particularly relevant for beachside properties where owners reserve the property for their own use during high-demand summer periods.
What happens if the property is not genuinely available for rent?
If a holiday property is deemed not genuinely available for rent and is essentially used for private purposes, no deductions can be claimed for that period. However, owners should still keep records of all expenses. Costs such as insurance, interest on borrowings, repairs, maintenance and council rates may be used to reduce any capital gain when the property is eventually sold.
Apportioning expenses for mixed use
Not all private use is treated the same. If a property is available for rent during all peak periods, including weekends, school holidays, Easter and Christmas, and the owner only uses it during off-peak periods when demand is low, the property may still be considered genuinely available for rent. However, expenses must be apportioned to reflect private use.
Apportionment is required whenever a holiday home is both rented out and used privately. This includes periods when the property is reserved for the owner, used by family or friends, affected by short-term accommodation restrictions imposed by state or local governments, or rented to family or friends at below market rates. In below-market situations, deductions for that period are limited to the amount of rent received.
Example: mixed use holiday home with short-term stay restrictions
Jerry owns a holiday home near beaches and bushwalking tracks. The area is popular with beachgoers in summer and hikers in winter. Due to a local government short-term stay restriction, Jerry can only rent the property for up to 180 days a year.
To stay within this limit, Jerry rents the property for 169 days per year from 1 December to 28 February (90 days) and from 14 June to 31 August (79 days). During the remaining 196 days, the property is either used by Jerry or made available to family and friends and is not advertised or genuinely available for rent.
For those 196 days, Jerry cannot claim deductions for expenses incurred during that period.
Over the year, Jerry earns $18,500 in rent and incurs total expenses of $35,000, including $2,000 in agent and advertising fees. The property is also rented to friends for two weeks at $100 per week, which is below market rates.
Jerry’s deductions are calculated as follows:
[(169 ÷ 365) × $33,000] + $2,000 = $17,279.45
For the two weeks rented to friends, Jerry can only claim deductions equal to the rent received, being $200, as the expenses exceed the rent for that period.
Jerry’s net rental income is therefore:
$18,500 – ($17,279.45 + $200) = $1,020.55
Get advice before issues arise
With increasing complexity around holiday homes, short-term accommodation restrictions and the ATO’s interpretation of what is genuinely available for rent, it is wise to consult a registered tax professional when questions arise. Getting advice early can help avoid costly tax issues later.
Speak to one of our accountants if you have any questions about the changes in tax for 2023.
