Owning a holiday home often comes with the best of both worlds: somewhere to escape with family and friends and the opportunity to earn rental income when you’re not using it.
But what happens if you keep the property for yourself during Christmas, Easter and school holidays, when rental demand may be at its highest?
Under the ATO’s updated guidance, simply listing your holiday home for rent doesn’t necessarily mean all the costs associated with the property will be tax deductible. How the property is actually used, including when you choose to use it privately, can matter.
Is your holiday home an investment or a lifestyle asset?
Many holiday homeowners would answer, “both”. You may rent the property out for part of the year, while also enjoying weekends away with family and friends. There is nothing wrong with that approach, but when it comes to claiming deductions, the distinction becomes important.
The ATO may look at whether the property is mainly used or held to produce rental income. This is particularly relevant where owners regularly reserve the property for themselves, family or friends.
Case Study: The Peninsula Beach House
John and Sarah own a beach house on the Mornington Peninsula. The property is listed on Airbnb and generates some rental income throughout the year. However:
- The property is blocked out every Christmas and January for family holidays.
- Easter is reserved for relatives.
- Friends occasionally stay at discounted rates.
- The property is rarely available during long weekends or school holidays.
John and Sarah consider the property an investment because it earns rental income and many of the ongoing costs are tax deductible. However, the ATO may take a different view.
When looking at the overall pattern of use, the conclusion may be that the owners have prioritised personal enjoyment over maximising rental income during the very periods when demand is strongest. This affects the costs that can be claimed as a tax deduction. Costs of owning the property such as interest, rates and insurance are no longer available.
Does any private use put your deductions at risk?
Not necessarily. A holiday home can still be mainly used to produce rental income even where there is some private use. The ATO’s guidance gives the example of a week or a few weekends of private use during the off-season, when there was no booking or very little likelihood of one.
The important distinction is the overall use of the property. Regularly reserving high-demand periods for yourself may present a very different picture from occasionally using the property during quieter periods.
Destination properties face greater scrutiny
If your property is located in a high-demand holiday destination, this issue becomes even more relevant.
Properties in locations such as the Mornington Peninsula, Phillip Island, the Surf Coast or similar holiday regions often command their highest rental returns during:
- Christmas and New Year
- Easter
- School holidays
- Long weekends
If those periods are consistently set aside for personal use, the ATO may question whether generating rental income is genuinely the primary objective of owning the property.
What does the ATO look at?
The ATO may consider a range of factors, including:
- Whether the property is available for rent during peak periods
- How often the property is rented to paying guests
- The extent of personal use
- Whether family and friends stay at reduced rates
- Whether rental rates are commercially realistic
- The overall pattern of use over time
No single factor is likely to determine the outcome. Instead, the ATO will look at the broader picture when assessing whether the property is genuinely being used to earn income.
What tax deductions could be at risk?
For many property owners, the largest annual costs are not cleaning or property management fees. They are:
- Interest on borrowings
- Council rates
- Land tax
- Insurance
- Repairs and maintenance
Where a holiday home is mainly used for recreation or private purposes, tax deductions for these ownership costs are no longer claimable. This can significantly change the after-tax cost of owning the property. Previously these costs were apportioned for the period that the property was available for rent during times of the property being either tenanted or on the market. Now the ownership costs will be denied entirely if the property is seen to be a lifestyle asset.
A quick check
If you own a holiday home, ask yourself:
- Do I reserve Christmas, Easter or school holidays for personal use?
- Is the property genuinely available for rent throughout the year?
- Would I prefer to keep the property vacant rather than rent it during peak periods?
- Do family or friends regularly stay at discounted rates?
- Is earning rental income one of my primary objectives?
If several of these questions make you pause, it may be worth reviewing your arrangements before your next tax return is lodged.
Time for a review?
For many of our clients, a holiday home is both a financial asset and a place where memories are made. The issue is not whether you can enjoy the property yourself. The issue is ensuring that your tax deductions align with how the property is actually being used.
The ATO will apply a compliance approach for the 2027 financial year to holiday homes that are predominately a lifestyle asset. As we are going into Christmas period it is a good time to review your holiday home arrangements and your record-keeping to ensure that the property is mainly used or held for producing assessable rental income. Where it is not, the ATO states that tax deductions such as interest, rates, body corporate fees, capital works and depreciation will be denied, although directly related rental expenses such as advertising, post-guest cleaning and booking commissions continue to be tax deductible.
