18 February 2020
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Tax traps in a weekender investment

Christine St Anne
10 December 2015

By Christine St Anne

Tax traps of a weekender investment 

In Weekend Switzer we ran an article on whether a weekender can be a viable investment.  I actually made that decision to buy a cottage in my favourite holiday getaway – the magnificent Blue Mountains in New South Wales.

I thought I could turn it into a little money-spinner and let it out as a holiday rental.  Not only do I now have a holiday getaway but I can also enjoy some juicy tax breaks — right? 

Wrong. Well, partly wrong.  The Australian Taxation Office (ATO) has some very strict guidelines when it comes to owning and managing a holiday rental.

In fact, the tax regulator has stepped up its vigilance on those owning holiday rentals and will pay close attention to the decisions made against that property.

I was looking forward to spending weekends in July during the mountains famed wintry Christmas in July period. Such plans were soon scuttled. The ATO does not allow owners to use the property during peak periods, if they want to claim expenses for tax purposes. Luckily, the mountains are lovely all-year-round!

You can’t claim expenses during the periods that you use the property. You must also be very careful when claiming deductions when you let out the property at ‘mate’s rates’ for family and friends. 

Don’t think you can get away with sneaking in a claim during your stay – the ATO can access a number of third-party data including the rental site you have your property listed on.

So what can you actually claim?

If the costs of owning the property exceed the income it produces, then you will be able to take advantage of negative gearing. Expenses you can claim include mortgage interest repayments and property maintenance costs. But remember, you can only claim those costs during the period it is rented out.

Also all the expenses incurred from trips to Ikea and Bunnings cannot be claimed immediately.  While the costs of renovating including costs to repair property damage can bring depreciation benefits these costs can only be deducted over a period of several years.

Don’t forget capital gains tax

Capital gains tax on a holiday rental is payable. You can minimise this capital gains tax by claiming the cost of legal fees, finance fees and maintenance costs.

It is important to keep accurate records to ensure you are declaring the correct income and expenses – and have the receipts to back up those records. 

For anyone contemplating buying a holiday rental, it’s probably a good idea to check out the ATO website.

The ATO’s website outlines some excellent case studies on the do’s and don’t when renting out to relatives or mates including what you can deduct and the income levels you can declare.

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