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Holiday Homes – A Tax Perk?

Holiday Homes – A Tax Perk?

Just as our summer holidays are coming to an end and we are wistfully dreaming of ‘what if’ regarding the purchase of a holiday home, there are a few things to keep in mind when dealing with your slice of paradise and the tax man.

Here are four scenarios which we will look at;

  1. Holiday home not rented out
  2. Holiday home fully rented out
  3. Holiday home not genuinely available for rent
  4. Holiday home rented out part of the year

1. Holiday home not rented out

If you keep a holiday home for purely private use, you don’t include anything in your tax return until you sell it. This means that all holding costs, including

  • Interest on mortgages
  • Rates, strata levies, water, electricity
  • Repairs & maintenance
  • Land tax
  • Insurance

are not tax deductible as there is no income earned to offset it. Renovation costs are also not deductible in this situation.

However when you sell the property, it is important to have kept records of all of these costs as when calculating the capital gain or loss on disposal, these holding and renovation costs will increase the cost base meaning that your capital gain is reduced by the amounts of these costs over the years held. This could be quite significant so it pays to keep detailed records and supporting documentation.

2. Holiday home fully rented out

If you keep a holiday home and it is fully rented out, you need to include the rental income in your tax return. You can claim expenses for your property to the extent that they are incurred for the purpose of producing income.

In some cases you will need to apportion your expenses claim if:

  • Your property is only genuinely available for rent for part of the year;
  • Your property is used for private purposes for part of the year;
  • Only part of the property is used to produce rental income
  • You charge less than market rate for family and friends

3. Holiday home not genuinely available for rent

Where the property is genuinely available for rent, expenses incurred on the property may still be deductible even though rental income has not been received.

Where however there does not appear to have a genuine intention to rent the property out, deductions for expenses will be limited (see the discussion at 4. below re part year rental)

Factors which give a non-genuine flavour to rental attempts include;

  • Rental rate is well above market rate
  • The property is advertised for rent in ways that limits its exposure such as by word of mouth or on restricted social media group;
  • The location, condition or accessibility of the property means that its unlikely to get rented;
  • You place unreasonable or stringent conditions on the property to reduce the likelihood that it will be rented out;
  • You refuse to rent out the property without adequate explanation

This would mean that all outgoings would not be deductible and, like the situation in 1. above, it would still be necessary to keep all records of outgoings for the purposes of calculating the increase to the cost base for capital gains tax purposes (and therefore reducing your capital gain) when you come to sell the property.

4. Holiday home rented out part of the year

The ATO has recently begun focussing on holiday home owners who rent out their property part of the year but claim the full year’s expenses unapportioned. When saying that it is rented for part of the year, this does not include the situation where it is genuinely available for rent but has not been rented. In that situation you may be able to claim the full amount of expenses.

If, for example , your personal use of the property is 4 weeks out of the year, then you would need to apportion all expenses and their deductibility would be limited to the percentage calculated as 48 weeks/ 52 weeks. However, the 4 weeks that you’re not claiming a deduction for can be included as holding costs when calculating a capital gain on disposal so again keep detailed records.

Where you rent to friends at ‘mates rates’, the expenses you can claim must not exceed the amount of rental income earned for the period that it is rented at less than market rates. Where the expenses are less then there is no issue – claim the expenses as incurred.

Other things to consider…

  • What is your anticipated holding period of the property? If you plan to retire there you may be able to claim the main residence exemption later;
  • If the property is negatively geared (ie. Expenses exceed income) and is held in a trust, the net loss will be quarantined at the trust level and not distributed to beneficiaries (assuming no other income in the trust)

 

Reach out to our team if you would like to understand more about the tax consequences of owning a Holiday Home.   info@stewartsmithadvisory.com