Holiday Houses

Holiday houses are great places to relax and disconnect from the busyness of life. They are also assets that have complicated tax consequences that need to be understood and recorded.

You should continue to maintain complete records of the purchase of the property and of property income and expenses, substantiated with receipts and/or statements where applicable.

Claiming expenses

Due to the often private nature of holiday houses, the Taxation Office pays special attention to the eligibility of the expenses to be claimed in the owner’s income tax return.

The expenses from a holiday house can only be claimed in your income tax return if they are incurred when the property was rented or ‘available for rent’.

For a holiday house to be available for rent, the owner must demonstrate that steps have been taken to rent the property at market rates. This can include evidence that the property was listed with a real estate agent, or advertising material aimed at attracting prospective tenants has been circulated. Holiday houses that are listed with a real estate agent at inflated prices are not considered available for rent. It may also be necessary to adjust the rent for seasonal factors.

Also, staying at your holiday house, even when no tenants were booked in for the property, will result in the house not being available for rent for those days. In this situation the expenses (such as interest) will have to be apportioned.

Apportioning expenses involves considering the number of days it was rented or available for rent over the entire year and only claiming a portion of the expenses. For example, say the total interest incurred on the mortgage was $6,800. You stayed at your holiday house 20 days over the year, with the remaining days (345) the property was either rented or available for rent. The deductible claim for interest would be:

$6,800 x 345/365 = $6,427

Expenses that cannot be claimed

Expenses that are not deductible for a holiday house include the cost of acquiring and disposing of the property, initial repairs and improvements to a property. Such improvements include renovations, extensions and alterations. Replacing an entire structure will also not be claimable. We recommend you maintain a detailed account of significant repairs made to your holiday house to assist in the preparation of your income tax return.

Expenses that are associated with buying or selling the house may instead form part of the cost of the property for capital gains tax purposes, thereby reducing the capital gain on sale. Improvements may be claimed over number of years if the house is being rented or is available for rent.

Sale of Holiday Houses

A holiday house is generally not your main residence and therefore is likely to be subject to capital gains tax. Any proceeds resulting from the eventual sale of the holiday house after deducting its cost base will be assessable to you if the house was purchased after 20 September 1985.

The costs of buying and selling your property can be taken into account when calculating any capital gain or loss. These costs include conveyancing, advertising, legal fees, stamp duty on the transfer, valuation fees and real estate agents’ commissions.

If the property is held for more than one year you will be able to take advantage of the 50% capital gains tax discount. This means that only 50% of any capital gain is taxable.

Costs of ownership

Expenses incurred that relate to the continuing ownership of a holiday house can also form part of the cost base of the property when it is sold.

Costs of ownership expenses include interest on funds borrowed to acquire the house, rates, insurance, maintenance and repairs, borrowing cost etc. These costs may be added onto the cost base of the holiday house and therefore reduce the capital gain on sale. This is available if these expenses were not claimed against the rental income from the property and the property was purchased after 20 August 1991.

We have prepared a worksheet to assist you in keeping track of these expenses. The worksheet can be found at: www.youraccountant.com.au/articles/resources.shtml

Published : 18 September 2008