Maximizing Your Tax Deductions: A Guide to Renting Out Your Holiday Home

Not surprisingly, there is an appeal to owning a holiday home, no matter how small. In Australia, around 2.7% of individuals report owning a holiday home of their own. But the majority of this number belongs to a certain group mainly situated in Melbourne. Supposedly, 1 in every 20 residents living in Melbourne owns a holiday home, which is double the rate of the rest of the country combined. 

As the capital city residents are seen to be more likely to own a holiday home, only 2% of people outside the capital have a holiday home. The non-capital city having a high percentage of such people is Sydney and Brisbane. 2.8% of the residents in Sydney own a holiday home. With owning such a luxury estate comes obligations and responsibilities. The tax implications for holiday homes work slightly differently than an ordinary house.

As Australia is a very popular tourist destination, a lot of tourists come here each year at different seasons. So many investors have started businesses renting holiday homes to tourists. A holiday home can be a good investment property. The rents have skyrocketed in 2023 as the same house that could be rented at $1,165 for a week last year is now being rented at $2,882. But with the rents, the cost of expenses rose as well.

What Qualifies as a Holiday Home?

When we talk about holiday homes in a conversation, we mean a home away from home where people can stay for short periods. These residential buildings work as accommodations for short-lived guests or renters. A holiday home can be anything from a vacation resort to a simple apartment. The value of the holiday homes depends on the location and the popularity of said locations to tourists or vacationers.

How to Rent Your Holiday Home to Claim Tax Deductions

It is common to see that owners try to get tax deductions for their properties, which is especially true for holiday homes. But the Australian Tax Office (ATO) always tried to encourage residents to know the ins and outs of their property tax implications to only avail deductions that apply to them. If you do not have a property accountant or a tax accountant, there are a lot of criteria you need to consider yourself.

If You Rent Holiday Homes

If the property is rented, you will have to include the rent specifications in your tax report, and the tax will be applicable accordingly. The rent will be included as income in your tax return. You will be eligible to claim some expenses you must spend to keep the property rentable.

What amount you can claim as expenses must also be apportioned accordingly. The scenario will change if you use the property privately for a part of the year or like to rent to close friends and relatives at a lower rate than the market.

If You Don’t Rent Holiday Homes

If you own a holiday home and never rent it out, you don’t need to show any income for the house in your tax return. If you decide to sell the property, you will have to calculate the loss and gain of the property to determine the tax value. It is better to keep track of all expenses and gains to calculate this final gain and loss value.

Holiday Homes That Are Genuinely Available for Rent

Now the issue arrives, whether the property is genuinely available for rent. By the “genuineness” of availability, we mean that actual efforts are made to rent the holiday homes. In this case, expenses can be deductible for the months the property remains without renters. In private use cases, the owner will not get claims for any expenses. Often, these expenses include maintenance costs, repair costs, property insurance, and interest on the loan taken to buy the property.

The ATO is always aware of the attempts at tax evasion by over-claiming tax deductions. Because of this, the officials pay close attention to the claim and tend to push back when something does not match up. The property might not seem up for rent genuinely upon inspection by the ATO because of several cases.

Selective Advertisement Issues

If you put your holiday home for rent, but there is little to no advertising, it comes to the authority’s notice as a duped attempt. So people sometimes try to disguise it by advertising in media that are unlikely to attract eyeballs.

To reduce exposure of the ads to potential tenants, some owners tend to advertise the property only at their workplaces, on select private groups, on restricted social media pages, or through word of mouth. These make the attempts null and void, as the chances of the property being rented are very low.

Excessive Rent

Let’s say that you put up proper advertisements on accurate platforms, but the rent listed is too high compared to other properties in the area. You cannot claim expenses for this property as it will not list as genuinely available for rent. People often do this to reserve the property for personal uses whenever needed while claiming a deduction.

In situations like this, the owner needs to keep proper records of the expenses caused for the holiday home. These records are needed for calculating losses and gains if and when the owner decides to sell the house. 

Unreasonable Rental Conditions

If you set some unreasonable conditions for choosing a tenant for your holiday home, then there is a chance that it will lose its “genuinely available for rent” tag. Sometimes, holiday homes come with conditions like ‘no children allowed,’ ‘no pets allowed,’ ‘no more than four people allowed,’ etc. These conditions have no proper reasoning.

In these cases, owners never allow tenants into their homes as they always nitpick about the smallest detail, making it difficult for the house to get rented. In such situations, the owner will not be subject to any deduction claims.

Not Renting to Interested People

If the owners put the property up for sale but do not approve anyone to stay there, then the house loses all purpose of being rentable. This happens mostly because the owners want to keep the holiday home empty for their use. They do not give any reasons to interested parties about why they cannot stay there.

Unlikely Location of the Property

If the property’s location is not that attractive to potential renters, it gets difficult to get the benefits. If a property is not easily accessible from the other amenities of the area, it is unlikely that tourists will seek to rent it during the holiday season. In this situation, complete inaccessibility keeps the owner from claiming the tax deduction and expenses for the property.

Private Use of the Property in Prime Seasons

The main reason for providing tax benefits is that a holiday home owner will open the doors for tourists and renters. But many owners tend to enjoy the use of the home partially on certain months of the year. If you keep the house empty for your use during the peak season but try to rent it in seasons when tourists might not be available, the house will not be listed as “genuinely available for rent.” 

Most holiday spots have a common time in the year when most of the visitors try to rent accommodations there. These same spots remain relatively empty during the off-season. The house must be available to be rented when the demand is high. Otherwise, the owners will not enjoy tax deduction to  for the property as they do not intend to make money off of renting the property.

Planning for Partial Year Rental

The tax implications in Australia are all reasonable, and the tax deductions are easily claimable if the interested party is willing to learn the details. Without a property accountant or a tax accountant, you can figure it out by following the rules.

Genuine Rental Intentions with Minor Private Use of the Property

The deduction calculations for a partial-year rental plan are straightforward: you claim deductions for the part of the year the property is put up for rent. If the holiday home is genuinely up for rent, the owners tend to live there for a couple of select weeks when there is not much demand for renting accommodations.

Any losses that occurred in an income year can be calculated from the rental income and caused expenses to keep the house ready for renting. The losses will be claimed by the owner or owners equally in their tax returns.

Renting at Market Rates Part of the Year

If your property is rented for part of the year at market rates, you will be permitted to claim the expenses for the time the property was on rent. You cannot claim benefits for the part of the year the property was under your use or the time the property was not in use. Typically, in situations like this, the deduction applies to only the actual days the property was rented.

Renting to Relatives at a Discounted Rate

If you want to rent the holiday home to your relatives during the time of the year, you do not use it; you will be able to receive deductions. But in most cases, the rent received from friends or relatives is lower than the actual market rate. Even though you will still get to claim the expenses for your property in scenarios like this, the calculations will be different.

You cannot claim the expenses for the time you use the property or when the property is not in use. You will only receive the benefits for the months, the house was rented. But here’s the catch. You will not claim all the expenses for these months because the rent rate is lower than the market. Even if the rent is low, the expenses will stay the same, possibly leading to a loss in income. The claimed costs will only be equal to the received rent during that period.

Tips to Receive Higher Tax Deductions

To improve your chances of getting favorable tax deductions on your returns, it’s essential to be cautious and truthful. Engaging in unlawful acts, such as tax evasion, can result in hefty fines if detected.

• There are some expenses that cannot be claimed until you sell your property, such as conveyance cost, cost of acquiring and disposing of the property, and stamp duty.
• Must make sure to keep the property genuinely available for rent.
• Keep track of the expenses. Even though you cannot qualify to claim expenses, keep track so that it can help in calculating Capital Gain and Loss if you ever want to sell the property.
• Keep all receipts. No matter how small the expense is, you must keep the receipts because the ATO might ask for the time of expense occurrence to check legitimacy.
• Advertise the property well so that people can know about the house to show interest in renting.
• Put up ads both online and offline, as it is a loss on your part if the property remains empty throughout the year.

It’s still advisable to consult a professional tax accountant despite having knowledge of income taxes and tax tips. Investax caters to many clients who generate supplementary rental income by renting out their holiday homes. Our team of specialist tax accountants is knowledgeable about what expenses can and cannot be claimed.

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