If you own a holiday home, it is important that it is treated correctly for taxation purposes. Here is a guide to the taxation implications of your holiday home.
Holiday homes that are not rented out do not need to be included in your tax return, until you sell it. You must keep records from the time you purchase the property until the time you sell it, so the capital gain or loss can be calculated upon sale.
If your holiday home is rented out, you can claim expenses for the property based on the proportion of the income year it was rented out or was genuinely available for rent. If the property is either used for private purposes for part of the year (for example is used by family or friend free of charge), or used by family or friends for part of the year and they are charged less then market rent, you must apportion your expenses.
Was my holiday home genuinely available for rent?
The following factors may indicate that a property is not genuinely available for rent:
- It is advertised in ways that limit its exposure to potential tenants, for example is only advertised by word of mouth, or only advertised outside annual holiday periods when the likelihood of it being rented out is significantly lower.
- The location, condition or the property, or accessibility to the property mean that it is unlikely that 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. For example, setting the rent above the rate of comparable properties in the area, or placing a combination of restrictions on the property (such as no children, references for short stays etc).
- You refuse to rent out the property to interested people without adequate reasons.
For example, if you own a coastal holiday home and you use a real estate agent to advertise your property, but instruct them not to advertise it during summer or school holidays, because you would like to use the property at those times. Subsequently, your property is not rented out at all during the income year. As your property as not genuinely available for rent, you cannot claim any deductions.
Can I claim deductions for a holiday home that I both used privately and rented out?
If a property is both rented out and used for private purposes, deductions cannot be claimed for the portion of expenses that relate to private use. Expenses are apportioned on a time basis when the property is used for private purposes for some of the year.
For example, if you have a holiday home that is rented at market rate, and is used by your family for 4 weeks if the year, you cannot claim expenses relating to those 4 weeks. If expenses for the financial year were $34,800, they must be apportioned. Your rental income and deductions for the year would be:
- Rent received: $25,650,
- Rental deductions: (48/52 x 34,800) = $32,124
- Rental loss $6,474
Therefore, you can claim a loss of $6,474 in your income tax return.