If you own a holiday home, you can only claim tax deductions for expenses to the extent the home is rented out or genuinely available for rent.
Even if you don’t rent out your holiday home, there are capital gains tax implications when you sell it.
Holiday home – not rented out
If you own a holiday home and don’t rent out the property, you don’t include anything in your tax return until you sell it.
When you sell the property, you will need to calculate your capital gain or loss.
Keep all records from the time you purchase the property until the time you sell it to be able to work out the capital gain or loss when you sell.
Holiday home – rented out
If your holiday home is rented out, you need to include the rental income you receive as income in your tax return.
You can claim expenses for the property based on the extent that they are incurred for the purpose of producing rental income.
You will need to apportion your expenses if:
- your property is genuinely available for rent for only part of the year
- your property is used for private purposes for part of the year
- only part of your property is used to earn rent
- you charge less than market rent to family or friends to use the property.
Holiday home – not genuinely available for rent
Expenses may be deductible for periods when the property is not rented out, if the property is genuinely available for rent.
Factors that may indicate a property isn’t genuinely available for rent include:
- it’s advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised
- at your workplace
- by word of mouth
- on restricted social media groups
- outside annual holiday periods when the likelihood of it being rented out is very low
- the location, condition of the property, or accessibility of the property mean that it’s unlikely tenants will seek to rent it
- you place unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out, such as
- setting the rent above the rate of comparable properties in the area
- placing a combination of restrictions on renting out the property – for example, requiring prospective tenants to provide references for short holiday stays and having conditions like ‘no children’ and ‘no pets’
- you refuse to rent out the property to interested people without adequate reasons.
These factors generally indicate the owner doesn’t have a genuine intention to earn rental income from the property and may have other purposes, such as using it or reserving it for private use.
Holiday home – part year rental
If you rent out your holiday home and also use it for private purposes, you must apportion your expenses. You can’t claim deductions for the proportion of expenses that relate to your private use or if it was not genuinely available for rent, such as when used or reserved for yourself, friends or family.
If your holiday home is rented out to family, relatives or friends below market rates, your deductions for that period are limited to the amount of rent received.