With the weather warming up and the holiday season just around the corner, many Australians will soon be heading to their home-away-from-home. Holiday houses can be a wonderful place of retreat whilst also being a worthwhile investment.

Rental income

Renting out your holiday house has advantages. However, you must declare the rent and claim the relevant expenses in your tax return. Expenses can include rates, repairs, interest, advertising, insurance, depreciation on fixtures and fittings and building write off. Provided the rent being asked is no more than market rent, you can claim expenses even when the property is not actually rented provided it is available for rent. Market rent may vary during the year due to seasonal demand.

You must reduce your expenses claim for any private use and this should be apportioned on a days basis. If you arrange with friends or family to charge them rent below the market value, the Taxation Office may restrict your claims.

Capital Gains Tax

There are also Capital Gains Tax (CGT) issues on selling your holiday home if it was acquired after 19 September 1985. The assessable capital gain is regarded as part of your income and is subject to income tax at your marginal tax rate.

The capital gain is generally defined as the difference between the cost base of the property (including capital improvements and extensions undertaken throughout the ownership period) and the sale price. The relevant CGT indexation or 50% discount portion of the gain is exempt from tax. The cost base can include various costs apart from just the purchase price, such as agent’s commission, legal fees, stamp duty, conveyancing and valuation fees.

Costs of ownership

If your holiday home was purchased after 20 August 1991, the cost base can also include the costs of owning the property provided you have not already claimed a tax deduction for those costs. These include council and water rates, insurance premiums, land tax, maintenance and interest on money borrowed to buy or improve the property.

For example, you rented out your property for three years before using it exclusively as a holiday house. The expenses incurred during the non-rental period can be included in the cost base for CGT purposes.

If you are not using your holiday house exclusively as a rental property, you should maintain records of these ownership costs. They can significantly reduce your CGT liability on the sale of the property.

Record Retention Periods

Records are usually required to be held for five years from the date of the transaction. However, records relating to depreciable items should be maintained for five years after the item is fully depreciated. Where an expense is included in the cost base of the property, the relevant record should be retained for five years after the sale of the property.

We would be pleased to help you setup and maintain a suitable asset register. It can be used to record all relevant costs and efficiently updated each year when preparing your income tax return. This simple process will ensure that you claim all your entitlements thus minimising your tax bill.