Many of us look forward to an annual getaway, either to the beach or the bush, as the best way to unwind and re-charge after another tiring year. For many Australians having a beach shack or bush retreat can be made more affordable by leasing out their properties to other holiday makers.
From an income tax point of view, the principles that apply to an investment rental property also apply to a holiday house if it is leased or rented out. Owners are therefore eligible to claim expenses for the property based on the proportion of the income year when it was rented out or, alternatively, based on when it was “genuinely available” for rent (more on this below).
Some deductible expenses can include: interest on funds borrowed to buy the house, property insurance, an agent’s commission, repairs and maintenance costs (such as materials, mower fuel, council tip fees, trailer hire), council rates, the decline in value of depreciating assets, and capital works.
As most would expect, if you also use the holiday house yourself, you cannot claim deductions for the proportion of expenses that relate to that private use. For example, if the house is made available to renting holiday makers for most of the year, but you reserve three weeks over an off-peak period to use it yourself, that three week period needs to be ignored when calculating deductions. This also includes use by other family members, relatives and friends.
If rent is charged to relatives and friends but is set at less than market rates, the Tax Office will only allow deductions that are limited to the amount of rent received for the period concerned. For example, if your holiday house is used by a niece or nephew for a week, and they pay a token $100 for the privilege, even though expenses such as those mentioned above add up to say $200, a claim for expenses is capped at the amount of rent received (that is, $100). However, if the rent received exceeds the apportioned rental expenses for that period, then that expense may be claimed in its entirety.
There is also some scope to make claims for “reasonable” travel costs if such travel is made to inspect, maintain or repair the holiday house. The proviso is that travel must be solely for these purposes, and not combined with simply going to the property to have a break.
An example of where travel costs may be able to be claimed could be the following.
A storm damaged a fence just before some renters were due to commence their holiday at your beach house. In this case, eligible expenses would not only include fence repair materials, rubbish removal and so on, but also travel to and from the house to fix the fence (even if practicality dictated that an overnight stay at the house was necessary).
The Tax Office is wary that some less-than-scrupulous holiday home owners may try to make expense claims for their property while not really intending to rent it out to others.
It has therefore outlined various factors that it believes may indicate that a holiday house is not genuinely available to be rented — leaving the property owner ineligible to make expense claims.
Factors that the Tax Office can be on the lookout for include a holiday house that is:
- advertised in ways that limit its exposure to potential tenants – for example, the property is 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, such as
- setting the rent above the rate of comparable properties in the area
- placing a combination of restrictions on renting out the property, such as requiring prospective tenants to provide references for short holiday stays and having conditions like “no children” and “no pets”
- you refuse to rent out the property to interested people without adequate reasons.
Reducing the eventual capital gain
Don’t forget that there may be capital gains to take into account when you eventually sell your holiday house, as only your “main residence” is exempt from capital gains tax (CGT). But there is scope to reduce your capital gain.
A capital gain is calculated by subtracting, from the property’s sale price, your original outlay plus certain eligible expenses incurred over the time as a consequence of owning the property — referred to as your “cost base”.
Where the property has been owned for at least 12 months, you are entitled to a CGT discount of 50% (provided that the property is held by an individual). The discount capital gain is to be taxed at your marginal tax rate.
Keeping accurate and valid records from the time you buy your holiday home is essential. But when the time comes to make your CGT liability calculation, some common expenses that may qualify to be included as part of the cost base of your holiday house are:
- legal fees and stamp duty on the purchase
- selling costs such as sales commissions and legal expenses
- certain capital improvement costs
- “holding costs”, such as water or council rates, and
- mortgage interest.
Note however that where you have claimed deductions for expenses in previous income years, as outlined in the first section of this article, these costs cannot be included in the cost base in calculating your CGT liability. Ask us further for guidance.