Owning a holiday home is an enticing proposition for many people, especially with the holiday season just around the corner. What could be better than having your own special sanctuary that you could escape to, while also having the option to renting the home when not in use? However, you will need to consider the following tax issues before you buy that holiday home:

Holiday Homes – not rented out

If you own a holiday home and do not rent it out, you do not include anything in your tax return until you sell it, at which stage, there are capital gains tax implications to consider.

Holiday Homes – rented out

If you rent out your holiday home, 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.

You must apportion your expenses between periods of:

• genuine rentaluse for private purposes – such as when you use it
• use for private purposes – such as when you use it yourself, or allow your family, relatives or friends to use it free of charge
• use by family or friends when you charge less than market rent.

Holiday Homes that are not genuinely available for rent

Expenses are only deductible if your holiday home is genuinely available for rent. Factors that may indicate a property is not genuinely available for rent include:It

• It is advertised in ways that limit its exposure to potential tenants (e.g. only advertised at your workplace, by word of mouth, outside annual holiday periods when the likelihood of it being rented out is very low)
• the location, condition of the property, or accessibility to the property, mean that it is unlikely 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 out (e.g. rent over market rates, references for short holiday stays, conditions like “no children” and “no pets”)
• you refuse to rent out the property to interested people without adequate reasons.These factors generally indicate the owner does not have a genuine intention to make income from the property and may be reserving it for private use.

These factors generally indicate the owner does not have a genuine intention to make income from the property and may be reserving it for private use.

Claiming deductions

Private use by owner

If you rent out your holiday home and also use it for private purposes, your expenses are apportioned on a time basis. You cannot claim deductions for the proportion of expenses that relate to the private use.

Example

A beach house is rented out all year except for four weeks during the Christmas break. The total expenses for the property are $26,000. The total deductible expenses would be 48/52 x $26,000 = $24,000. Therefore, only a proportion of the expenses incurred on the property can be claimed.

Private purposes include use by you, your family, your relatives and your friends at discounted rates/ free of charge

If your holiday home is rented out to family, relatives or friends below market rates, your deductions for that period are limited to the amount of rent received.

Example

The market rent for your beach house is $800 per week but you rented it out to a friend for $200 per week for 3 weeks. The total expenses for the property are $20,000. You can only claim up to $600 (instead of $1,154 – 3/52 x $20,000) worth of expenses as this is the amount of the rent relating to the 3-week period.

Instead, if you had charged $400 per week, you would be able to claim the full $1,154 worth of expenses as the rent relating to the 3 weeks of $1,200 exceeds the expenses.

As seen above, there are several matters to consider in relation to your holiday home. Should you wish to discuss this in more detail, please contact your Altitude Advisor.