Tax Return:: Tax Treatment for Your Holiday Home
Hello, this is your tax accountant, P&C Tax Professionals.
I’m sure many of us often dream of owning a beach house as our holiday home. However, due to the high amount of expenses that are involved in managing and maintaining the property, the best way to make it financially viable is to rent out the property to the public for either part or for the full year. With the increasing popularity of owning holiday homes in Australia, the Australian Taxation Office (ATO) has been thoroughly investigating tax deductions related to these holiday homes in order to prevent people from over-claiming their expenses. In our blog post today, we will explore the tax implications that are in place for holiday homes situated in Australia.
Holiday homes that are not rented out
If you possess a holiday home and do not rent it out, you do not need to report anything on your tax return until you decide to sell the property. Upon the sale of your property, you must work out your capital gain or loss amount and report the figures on your tax return.
It is recommended that you keep all documents related to your holiday home from the moment you purchase the property until the point you sell the property in order to accurately calculate your capital gain or loss.
Holiday homes that are rented out
If you choose to rent out your holiday home, you are required to report the rental income on your tax return. You can also claim expenses related to the property, but only to the extent that they were incurred to generate your rental income.
You are required to properly apportion your expenses if:
> your property is genuinely available for rent for only part of the year
> your property is used for personal purposes for part of the year
> only a portion of your property is utilised to generate rent
> you rent out the property at a rate that is lower than the market value for your family or friends.
Holiday homes that are not genuinely available for rent
It is possible to claim your holiday home related expenses as a deduction even during periods when the property is not being rented out, provided that the property is genuinely available for rent.
Here are some of the factors that could indicate that the property is not genuinely available for rent such as:
> Advertising the property in ways that limit its exposure to potential tenants - for instance, only advertising the property:
- at your workplace
- through word of mouth
- within restricted social media groups
- outside of annual holiday periods when the possibility of renting it out is relatively low.
> The location, condition, or accessibility of the holiday home makes it unattractive to potential tenants
> The owner sets unreasonable or restrictive conditions on renting it out such as:
- charging a higher rent in comparison to other properties that are also in that same area
- putting in place a combination of restrictions on renting out the property (e.g., requesting prospective tenants to provide references for short holiday stays they have had in the past and restrictions such as “no children” or “no pets allowed”).
> You refuse to rent out the holiday home to interested parties without any valid reasons.
All of these factors typically suggest that the owner lacks a genuine interest in producing rental income from the property and may instead have other motives such as keeping it for their own personal use or reserving it exclusively for their own purpose.
In summary, owning a holiday home can be a dream come true for many of us, but it does also come with a range of tax implications that should not be overlooked. Whether you are renting out your property or keeping it solely for personal use, it is important to understand your tax obligations and entitlements. By following the guidelines and regulations set out by the ATO, you can ensure that you are accurately reporting your income and expenses, and avoid any potential legal or financial issues down the line. Ultimately, by taking the time to carefully manage your tax treatment for your holiday home, you can make the most of your investment and enjoy your property with peace of mind.