Does the holiday home dream stack up?
20 Nov 2015
It’s coming to that time of year when you spend time relaxing with family and friends in your favourite holiday destinations. A thought that often follows is, ‘Wouldn’t this be a great place to buy for our future holidays and as an investment for our retirement?’
Serious thought is often given to such an idea especially as there may be associated benefits, but it is important to seek appropriate advice as to how you can claim possible rental deductions and whether capital gains tax will apply.
The Australian Tax Office (ATO) has announced that it will increase its focus on rental property deductions by allocating considerable resources to target excessive deductions claimed for rental properties, especially those located in popular holiday destinations.
Understanding the tax principles on holiday homes
If you want to invest in a holiday home, it’s important to understand the tax principles that apply to rental properties also apply to rented holiday homes. More specifically, if a holiday home is rented out, then relevant expenses can be claimed against the rental income. Claiming tax deductions in relation to holiday homes often becomes more complex if the home is used for private purposes or the home was not genuinely available for rent.
Tax deductions that may be claimed against rental income include:
> repairs and maintenance but not improvements
> depreciation of items in the house, for example, ovens, dishwashers and carpets
> land tax and other council rates
> interest expenses
> utility costs
> travelling costs.
These deductions may persuade you to think a holiday home investment is enticing. Where the holiday home is partly used for private purposes by your family and friends, then expenses will need to be apportioned accordingly.
These expenses are apportioned on a time basis. You calculate how many days the home was rented out or available for rent and how many days the home was used privately. A holiday home can be rented to family or friends at less than the market value rental rate. In such situations, deductions will be limited to the amount of rent received during that time.
What is ‘genuinely available for rent’?
We regularly get asked what is meant by ‘genuinely available for rent’. To help answer this the ATO has published a number of indicators that they believe indicate a property is not genuinely available for rent, such as:
> when a property is advertised in ways that limit its exposure, for example at a workplace,
word of mouth, outside of annual holiday periods
> when the location of a property, its condition or its accessibility means it is unlikely tenants will rent it
> if unreasonable or stringent rental conditions are set, for example, setting the rent above the rate of comparable properties and placing multiple conditions on the renters
> when a rental request is refused from interested and qualified people without adequate reasons.
To reduce your chances of the ATO refusing your deductions, it’s a good idea to use a property agent or list the property on an internet holiday rental website. This may satisfy the ATO that a property is genuinely available for rent.
Selling your holiday home
When your needs change and it comes time to sell your holiday home, capital gains tax (CGT) may apply.
Unless the home was used as your principal place of residence during the ownership period, it will be subject to CGT. When calculating CGT, the property’s cost base is subtracted from the final sale price.
Importantly, when calculating a cost base for the property, most expenses that have not been claimed as tax deductions will form part of it. Over the years, expenses may add up to thousands of dollars, but receipts, which must be kept, are often lost if the house has been held in the family for many years. This could be costly, as keeping a proper record of expenses can significantly reduce CGT or may even justify a capital loss.
Whilst the thought of owning a holiday home sounds exciting, you must tread with caution especially if you require it to be tax effective.
Speak to your Private Client Adviser if you are thinking about purchasing a holiday home to find out if it makes sense for you.