Renting your Holiday Home – what is the Effect on your Income tax Return?
This one can be a little complex and obviously there are a number of variations so please consult a professional before lodging your return.
Lets look at the most simple situation;
You buy a house in a popular holiday location, lets say Rye on Victoria’s Mornington Peninsula. You engage a professional manager and rent out the property as much as possible. The house proves popular and is rented 50 weeks of the year (some weeks for the weekend, other weeks for the whole week). In Fact its so popular you and your family never get a chance to visit and enjoy the house yourselves, in this case your holiday house functions exactly the same way as any other rental property. You put the Rental Income on your Tax Return and claim the matching Deductions. At the end you may have a profit (positively geared) or a loss (negative geared).
But next year you decide you really want to spend Summer at your holiday house so you block out 4 weeks in January for your family so no one else can book it. This is where complexity and problems can begin you see the Tax Laws state;
S8-1(1) ITAA 1997 “You can Deduct from your Assessable Income any loss our outgoing to the extent (a) It is incurred in producing your assessable income” This is the section that allows you to deduct things like your Property Rates, Insurance, Mortgage Interest. Looks good so far;
However section 8-1 goes on in subsection 2 to state: “However you cannot deduct a loss or outgoing under this section to the extent that (b) it is a loss our outgoing that of a private or domestic nature”
In my example above what this means is that you need to allow for your Families’ private use of the Holiday house and reduce all the associated expenses by 4 weeks. This is where many taxpayers go wrong; they do not allow for the private use of their holiday house. “Forgetting” to allow for this or just blatantly ignoring this requirement is not advisable. The ATO has been focussing on this area very closely in recent years and they are very successful in their Holiday Home Audits. For example if you block out times that your Holiday home is not available in AirBnb the ATO will be able to access this information.
If you are claiming tax deductions for your Holiday Home you also need to make sure your home is available for rent and is genuinely available. For example the nightly rate should be set by the market and your rental should be in an area that people do want to rent holiday rentals. Otherwise the ATO can throw out your hole claim and decide your holiday home is 100% Private in nature.
As Tax Agents we see some more complex or perhaps “Dodgy” scenarios, those people that come in and what to claim every expenses to do with their holiday home and yet they have only rented it out for a week or two? Or perhaps they have rented it for 3 weeks to good friends (at a fraction of market price) these situations are not commercial and most likely your holiday home may be 100% private in nature or perhaps your need to limit your deductions to equal the amount of income that you earned like we discussed on my last Article on Renting Property to Family.
If you want professional advice on your rental property situation please get in touch.