If the “Great Australian Dream” is to own your own home, then a close second would be to own your own holiday home, spending school holidays and Christmas breaks with friends and family. However, it’s important you’re aware of how owning a holiday home can impact your tax return so you can maximise the enjoyment of your getaway property.

Renting out when you’re not using the property

If you rent your holiday home out when you are not using it, the rental income you receive will be taxable. This is regardless of whether it is rented on Airbnb or other short-stay providers, or whether it’s a fixed-term lease. Some examples of potentially deductible expenses are:

  • Loan interest on the mortgage
  • Repairs and maintenance
  • Agent letting fees and property management fees
  • Depreciation (building and furniture)
  • Council rates, and
  • Land tax.

This is effectively the same as having an investment property.

However, the difference is that you can only deduct expenses for the portion of time that the property is genuinely available for rent.

See example below over a 12-month period:

  • 2 months – personal use for holidays.
  • 1 month – property sits vacant not advertised/available for rent.
  • 2 months – property is advertised for rent but sits vacant.
  • 7 months – property is either rented or advertised.

Under the scenario above, you can only deduct 9/12 months (2 months + 7 months) pro-rata of the eligible deductible expenses.  “Genuinely available for rent” is described by the ATO as:

  • Property is being rented (must be at market rate rent, and not cheap rent to friends or family); or
  • The property is not currently rented but is advertised for rent in a way that is not limited (i.e. not just word of mouth). Therefore the safe option is to ensure it is advertised on a reputable short-stay website or via a real estate agency
  • The property is maintained in a safe and tenantable condition (i.e. it is not run down and uninhabitable despite being advertised for rent)
  • No unreasonable restrictions for renters (i.e. no children allowed)
  • You cannot deliberately reject reasonable applications to rent as this shows a lack of genuine intention to rent the property out

Selling your holiday home

Any property that you own that isn’t your elected primary place of residence (where you live and reside) will be subject to CGT (Capital Gains Tax). This means that regardless of whether you rent out your holiday home or use it exclusively for your private use, the property will still be subject to CGT.

If you hold the property for more than 1 year, you will still be eligible for the CGT general discount of 50% less tax on your capital gain.

Strategies you can use

Depending on your circumstances, there are effective strategies available to maximise the financial side of your holiday home.

For example, there is the 6-year rule which means  Capital Gains Tax (CGT) won’t apply if the property remains your elected main residence.

Capital Gains Tax (CGT) 6-year rule

If you purchase and move into a property (assuming you only own that one property) and live in it as your main residence, then move out, you can still elect for that property to be your main residence for a period of up to 6 years without having CGT apply. This only works if you are renting the property you move into next, and not buying a second property to move into, as you can only elect one property to be your main residence at any given time. You don’t even need to move back into the property before selling to not pay CGT, as long as this is within the 6-year timeframe.

The best part of this strategy is you can do this an unlimited number of times, however for another 6-year period to be valid, you must be living in the property, so after the first 6-year period, you will need to move back in and establish the property as your main residence.

Building or Buying New vs Buying Established

If you build your holiday home or buy brand new, generally there will be significant depreciation expenses rather than buying an established property, and will therefore be more attractive from a tax perspective. However, make sure you speak to your financial advisor to ensure this is the right option for you.

For more detail on holiday home tax treatment, the ATO has released a specific guide here.

Have a holiday home and need help with your tax return?

At Carbon, our accountants have seen and dealt with a wide variety of different scenarios when it comes to holiday homes for their clients. Get in touch with us to find out how we can help.