The taxman-friendly approach to buying a holiday home


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Holiday homes rarely make good financial investments, but of course there are still good reasons why people want one.

"I would love to buy a rural retreat about two hours from the city so my family can spend quality time together several times a year," writes Money reader David.

"Everyone tells me this makes no sense moneywise, so what can I do to at least recoup some of my outlay on this property?"

holiday house tax

Well David, the good news is there are some things you can do to make your holiday hideaway a partial investment.

The first rule is to buy in an area where there is proven tourist demand. David's idea of two hours from a major city sounds good, provided it also has some other attractions.

It could be a beachside retreat, a charming country town or a rustic cottage set among the vines.

Second, and probably most important, you need to be organised about when you want to use the property personally.

If at all possible, try to schedule your visits over the next year or at least six months. You must do this if you want to treat your holiday home partly as an investment property and receive tax breaks. The rules are strict.

"You cannot claim deductions for rental properties that are not genuinely available for rent," says the tax office website. But what does this really mean?

It means that if the property is mainly used by you, your family and your friends, it is not deemed to be a rental property, even if some do pay you a minimal amount.

But if you make the property available for commercial letting, at a commercial rental, the amount you receive is clearly accessible earnings.

"It's a question of deciding what amount of losses and outgoings incurred in connection with the properties is allowable as an income tax deduction," says the ATO website in its discussion of Taxation Ruling IT 2167.

One method used by the ATO has been to apportion the losses and outgoings based on the proportion of the year that the property was let.

An example is a holiday home for which the Taxation Board of Review No 1 apportioned 4.4% of the losses and outgoings as claimable.

This was based on the fact that the home was let for 16 days (4.4% of a year), used by the owners for 107 days and vacant for the rest of the year.

But should there also be an apportionment for the time a property is available for lease but not tenanted?

The ATO discussion says it's a case-by-case decision, but adds that the period during which a property was available for letting will only be taken into account where it is "established that active and bona fide efforts to let the property at a commercial rental were made during the relevant period".

In other words, if you are to stand a chance of getting a deduction for the total time your property is available for letting, make sure you have evidence - such as proof it was listed with an estate agent for specific periods and was advertised widely.

You might also want to claim travel expenses to maintain and inspect the property. These are likely to be allowed only when the travel is not associated with your personal use of the property.

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Money's founding editor Pam Walkley stepped down in early 2015 after more than 15 years at the helm. Before that she was at the Australian Financial Review for 11 years, holding several key roles including news editor, chief of staff and property editor. Pam is now a senior writer for Money.