A holiday home is a common investment for many Australians. Often the holiday home is rented out for part of the year to help finance the cost of owing the property or just to provide an additional source of income. The rent received must be declared in the owner’s tax return as income against which related expenses can be claimed as tax deductions. In this article we cover some of the essentials in claiming holiday home rental expenses.
What can be claimed as a tax deduction?
As with traditional rental properties most expenses incurred in running a holiday home may be deductible. These include:
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Advertising costs
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Agents fees and commissions
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Body corporate fees
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Council rates
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Depreciation on assets and buildings
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Insurance – building/landlord
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Interest on funds borrowed to acquire the property
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Land tax
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Repairs and maintenance
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Water rates
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And more
When are these expenses deductible?
The most common mistake when accounting for holiday homes in a tax return is claiming expenses for the entire year.
Expenses are only deductible where the property is rented out or when it is genuinely available for rent even if it is not rented at that time. Therefore, expenses incurred when the property is used for private purposes or while it is not genuinely available for rent are not claimable.
Private purposes include periods where it is used by the owners or the owners’ family or friends for free. Genuinely available for rent means the owner is making a bona fide attempt to rent the property and that it has a realistic chance of being rented. Factors that suggest it is not genuinely available for rent include:
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Only using advertising that has limited exposure (such as word of mouth)
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Only making the property available at low demand times (i.e. when it is unlikely to be rented)
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Poor property condition
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Poor location and accessibility that make rental unlikely
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Placing unreasonable conditions on renting the property
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Asking for an unrealistic rental amount
How to calculate deductions correctly
Where a holiday home is used to genuinely produce rental income during a year, but is also used for private purposes or has periods where it is not genuinely available for rent, expenses must be apportioned. Generally, this is done on a time basis. For instance, where a holiday home is rented for 3 months and not available for rent for the other 9 months, 25% of expenses, representing 3 months out of the entire year, will be deductible.
Expenses that relate directly to rental income such as advertising and agents commission do not need to be apportioned.
Where the holiday home is rented at below market rates to a related party, the deductions for that period are limited to the rental income received in that period.
Is the sale of a holiday home subject to capital gains tax?
In most cases, a holiday home will be subject to capital gains tax. This is because generally the owners will claim the main residence exemption on another property (such as their home). However, in addition to purchase, selling and capital costs, expenses incurred in holding the property that could not be claimed as tax deductions will also reduce any capital gain. These include rates, land taxes, insurance and repairs while the holiday home is not rented or available for rent. For this reason, it is important to keep records for all holiday home expenses for the entire period of ownership.
For more information on this topic, or for assistance with correctly declaring your holiday home, contact our team at Private Wealth Accountants.