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Everything you need to know about Holiday Rental Tax Deductions

Do you own a holiday rental property? Perhaps you’re thinking about buying a holiday house for investment purposes. Either way, you could be eligible to get some money back on your Tax Return. You just need to be careful of what you claim. 

According to the Australian Taxation Office (ATO), around 8% of Australians own a holiday home investment. There is also around $8.7 billion shortfall between what tax individuals are expected to pay vs what they are actually paying. 

Because of this, the ATO is now looking very closely at what tax claims you make which relate to holiday homes/investment rental properties to make sure you aren’t over-claiming on tax deductions. 

Here’s what the ATO has indicated they are targeting:

  • Property expense claims: owners who are claiming deductions for costs incurred while travelling to their property. Unless you’re in the business of letting rental properties, you can’t claim travel costs. 
  • If you’ve taken out a loan to purchase a rental property you can claim interest. Using the loan money to purchase a new boat, go on holiday or to pay for living expenses is not tax deductible. 
  • Claiming capital works or initial repairs as a lump sum instead of spreading it out over a number of years.
  • Repairs for damages that existed prior to the property being purchased being claimed as an immediate deduction.
  • Incorrectly dividing up expenses and claiming deductions for periods of time where either you or family and friends are using the property (rent-free).

So, is your family holiday home eligible for tax deductions?

Here’s what you need to know to get it right

  1. Declare rental returns as income

If you’re wondering if you pay tax on rental income in Australia, the answer is yes. If you rent out your holiday home during the period you’re not using it, you need to declare the rental return as income on your Tax Return. 

You’re only eligible for holiday rental tax deductions for the time when your home is advertised and available for rent, or is currently rented out. 

  1. Renting out your holiday home

If you buy a holiday home, you can only claim deductions for periods that your holiday home was being rented or was genuinely available for rent. This means personal use, or friends and family living there rent-free cannot be claimed. 

The ATO has found that homeowners are claiming deductions on their holiday home on the grounds that it is being “rented” out, but in reality, it was often friends and family, even the owners themselves, living there rent-free. 

  1. Claiming the costs of renovations, repairs and maintenance 

With repairs and maintenance, the ATO will be cross-checking claims. Any repairs or maintenance to restore something that is either broken, damaged or deteriorating are immediately tax deductible. 

Home improvements, renovations or existing damage repairs at time of property purchase cannot be claimed as an immediate tax deduction in 2021. But, can be claimed over a number of years as capital works deduction. 

  1. Splitting income and deductions evenly between owners

The ATO is paying close attention to couples who split income and deductions unevenly for tax purposes. Make sure that if you jointly acquire a property with your partner, everything including income and deductions is evenly split between both parties. If one partner owns 40%, they can only claim 40% of the expenses. 

What holiday rental property expenses are tax deductible? 

So ATO, what can I claim? Expenses you can claim as tax deductions for your holiday rental property can include: 

  • Advertising costs; finding new tenants
  • Repairs and maintenance costs
  • Body corporate fees
  • Council rates
  • Property insurance; home contents and landlord
  • Gardening, cleaning costs, pest control
  • Costs incurred for inspections and yard maintenance 
  • Interest on loan used to purchase home
  • Capital works; renovations  
  • Depreciating assets; appliances, blinds & carpets, furniture

What you can’t claim 

  • Conveyancing costs, advertising costs and stamp duty when acquiring and selling the property. The ATO counts these as part of the acquisition cost which forms part of your cost base. 
  • Costs in relation to the property which the person renting currently pays
  • Loan funds being used for personal use, purchases and activities i.e. buying a boat

Holiday rental tax deductions you can claim over a number of years

  • Borrowing expenses linked to financing of the property
    • Title search fees
    • Loan establishment fees
    • Stamp duty charged on the mortgage
  • Depreciation costs on assets
    • Air conditioners, hot water systems, appliances
  • Capital works deductions
    • Home improvements, renovations

Can you claim travel expenses when you inspect or repair a holiday rental property?

According to the ATO, if you don’t have an ownership interest in the rental property, you can’t claim travel expenses, even if you travel for the purposes of maintenance or inspections. If you are in the business of letting rental properties or an excluded entity, such as a managed investment trust, you are eligible to claim travel expenses, which include:

  • Preparing the property for new tenants
  • Inspecting the property during or at the end of tenancy
  • Undertaking repairs, where those repairs are because of damage or wear and tear incurred while you rented out the property
  • Maintaining the property, such as cleaning and gardening, while it is rented or genuinely available for rent
  • Collecting rent
  • Visiting your agent to discuss your rental property

Can you claim stamp duty on tax? 

The short answer is no. You can’t claim an income tax deduction for stamp duty on your investment property when you first purchase it. That said, capitalising on stamp duty is possible. You may be able to offset the cost of stamp duty against your capital gains tax liability when you sell the property.

Rental income for tax in Australia

The rental money you receive for renting out your holiday investment property is considered to be assessable taxable income. This means it must be declared in your income on your Tax Return. 

Taxable IncomeTax Rates
0 – $18,200Nil
$18,201 – $45,00019c for each $1 over $18,200
$45,001 – $120,000$5,092 plus 32.5c for each $1 over $45,000
$120,000 – $180,000$29,467 plus 37c for each $1 over $120,000
$180,001 and over$51,667 plus 45c for each $1 over $180,000

Not declaring rental income in Australia

The ATO now has access to third party platforms, including major rental listing websites for holiday rentals that are both short term and long term. They are now able to match the data received from these sources to the claims listed on your Tax Return to make sure that your property was available for rent.  

To avoid an ATO audit, One Click Life advises you to take extra care when it comes to claiming deductions on your holiday home. Make sure you keep all records to support and justify what you claim. If you’re confused about what to claim, speak to a friendly accountant today.