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 New draft guidance from the Australian Taxation Office will severely restrict tax deductions for rental properties deemed ‘holiday homes.’
If you (or those close to you) use your rental property privately as a holiday home, the ATO’s new draft guidance on rental property deductions might reduce the tax deductions you can claim.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:
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).
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:
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:
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:
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.
If you are concerned about your rental property and would like an analysis undertaken of your risk position, please let us know.