What are legitimate holiday home tax deductions?
A taxpayer that owns and rents a holiday home can claim tax deductions against rental income for expenses such as interest on loans, borrowing expenses, repairs, rates, land tax, depreciation and capital works spending in respect of the time the holiday home is actually rented out or genuinely available for rent.
For the period the holiday home is not rented out or not genuinely available for rent, such a taxpayer will not be allowed to claim a tax deduction (i.e. deductions must be reduced to reflect that non-income producing period). A holiday home will not be genuinely available for rent even if the holiday home is advertised for rent if unreasonable conditions are placed on prospective tenants or rental rates are set above market rates.
Also, if the holiday home is rented out to family or friends at a rate lower than market value (e.g. mates’ rates), the deductions will be limited to the actual (lower) amount of rent received in that period.
When the holiday house is sold, capital gains tax will be payable if the sale proceeds exceed the costs associated with the property’s acquisition and sale, plus any improvement costs not previously claimed as a tax deduction.
Tips for keeping good records
In today’s electronic data-matching environment good record keeping is extremely important to substantiate claims for deductions, to obtain faster GST refunds and assist the business in operating more effectively.
We recommend that you adopt the following tips to ensure that your business keeps good records:
- Obtain valid tax invoices for all purchases that include GST;
- Keep accurate records of all sales and purchases;
- Make electronic copies of all your documents and ensure these are stored properly.
Remember that all relevant documents need to be kept for at least 5 years. Note that if CGT is payable when a landlord sells a property, accurate records should be kept over the ownership period and 5 years after selling the property – those records should comprise copies of the original purchase and sale contracts, details of improvements to the property, legal, real estate and valuers’ costs and other holding costs.
We would like to avoid any unnecessary stress, pressures and costs caused by an ATO audit of your business affairs and therefore we want to help your business adopt “best practices” methods to limit your risk of being subject to an ATO audit.