ATO raises bar for rental property 'holiday home' tax deductions

Do you or friends and family use your rental property to take breaks? New draft guidance from the Australian Taxation Office will severely restrict tax deductions for rental properties deemed ‘holiday homes.’

If you (or those close to you) use your rental property privately as a holiday home, the ATO’s new draft guidance on rental property deductions might reduce the tax deductions you can claim.

This month, the ATO released a new draft ruling (TR 2025/D1) to replace the existing guidance on rental property deductions (IT 2167) and two guides (PCG 2025/D6, PCG 2025/D7) documenting the ATO’s compliance approach. The ATO states that they will not apply compliance resources to deductions for rental properties that are holiday homes under the new guidance before 1 July 2026 if you incurred the expenses (or entered into an arrangement for those expenses) prior to the date the new guidance was released (12 November 2026).

The ATO applies a three-step approach to income and deductions for rental properties:

1. Is the property being used to produce assessable income?
2. Is this property a holiday home (see Is your rental property a holiday home? The new definition)
3. Work out your deductions and apportion them appropriately. 

The sting in the tail of the enhanced guidance is the impact on rental properties that might be classified as ‘holiday homes.’ If your rental property is deemed a holiday home, the property’s primary purpose is no longer income producing (even if you earn money from it) and as such, you cannot claim deductions from losses or outgoings relating to property ownership (e.g., interest on a mortgage, repairs and maintenance, land tax, and council rates). For many caught by these rules, this new interpretation fundamentally changes the economics of holding a rental property unless you change how you use it.

If the property has always been used to produce an income and has never been used privately by you or those close to you, then the rules on rental property deductions are broadly similar to previous guidance.

The guidance applies to properties that you own personally or jointly (not as a business or through an entity).

Is your rental property a holiday home? The new definition.

The new guidance seeks to define what a rental property’s primary purpose is. Is it truly for income producing purposes or is it a holiday home that you happen to earn income from? The problem for owners lies in how the ATO determine the property’s purpose.

A ‘holiday home’ is a property that is used (or held for use) for your holidays or recreation (or the holidays or recreation of your family members and friends for no rent or at a reduced rate). The guidance sets out risk zones. Properties at high-risk of being deemed a ‘holiday home’ include:

• Where availability is blocked out for personal use each year (no rent or reduced rent for you, friends, family or associates), particularly during periods of high rental demand (prioritising personal use over income producing potential).
• Limited attempts are made to rent out the property.
• Major features of the property, or parts of the property rented out, are inaccessible even when the property is being used by guests.
• Unreasonable restrictions are placed on potential renters that contribute to low overall occupancy (the guidance gives the example of a property that must be booked in 4 day blocks except Sundays which are held in the case the owner wants to use it).
• Where property is advertised at a price above the market rate (making it look like its available for rent but really is priced out of the market). 

The line between holiday home and rental property is thin in the draft guidance. For example, a rental property that has high occupancy rates during a 4 month peak season but is used by the owners for one week each year during peak periods appears to be acceptable, but a property that is used by the owners for a few days per fortnight during peak seasons would be classified as a holiday home.

To determine if your rental property is a holiday home, the ATO stress that there is not one distinct factor but a combination of factors which includes how and when the property is used or available for private use during periods with the highest income earning opportunities:

• The way your holiday home is actually used;
• The time your holiday home is dedicated to income-producing use;
• The time your holiday home is used for private use, or held for potential private use;
• The extent to which your holiday home is actually available or used as a rental at a time when use of such a property is desirable for holiday pursuits (such as during school holidays, public holidays or peak seasonal demand periods).

Loss of tax deductions for a ‘holiday home’

If your rental property is deemed a holiday home, the ATO will apply the ‘leisure facility’ integrity rules – because they don’t want taxpayers contributing to the costs of a property that they believe is primarily your holiday home.

As a leisure facility, certain deductions relating to acquiring, retaining and holding the property will be denied unless an exception applies. These include:

• Interest on a mortgage
• Repairs and maintenance
• Land tax, and
• Council rates

The exception applies if the rental properties is ‘mainly’ used to produce assessable income (not a ‘holiday home’). 

Other costs will remain deductible for holiday homes where they relate to how the property earns income such as advertising costs to rent the property or cleaning costs after a guest stay.

It will be important to keep accurate records of how the rental property was used during the year, by who, and the evidence of the expenses incurred.

Need assistance?

If you are concerned about your rental property and would like an analysis undertaken of your risk position, please let us know.

References

• TR 2025/D1 - Income tax: rental property income and deductions for individuals who are not in business
• PCG 2025/D6 - Apportionment of rental property deductions - ATO compliance approach
• PCG 2025/D7 - Application of section 26-50 of the Income Tax Assessment Act 1997 to holiday homes that you also rent out - ATO compliance approach
• ATO overview for rental property owners