Holiday Home Tax Rules
The ATO's key test is simple.
Is the property primarily used to earn income, or primarily used for your own enjoyment?
Get it wrong
You'll lose deductions you thought were legitimate.
Get it right
You can claim a lot more than many owners realise.
The primary purpose test: If your holiday home is not used primarily to earn assessable income, you cannot claim most deductions. Your intention doesn't matter. Your claim doesn't matter. What matters is what the property was actually used for.
Two scenarios. Very different outcomes.
Example — Scenario 2 apportionment
Rachel — Noosa holiday home
Rents out 50 weeks per year. Uses it herself for 2 weeks.
Claimable
96%
50/52 of ownership costs
Not claimable
4%
2/52 personal use period
This applies even if those 2 weeks are in the off-season when there were no bookings available. The personal use period blocks deductions, whether the property could have earned income or not.
How the ATO determines primary purpose
The ATO looks at actual facts, not intentions or paperwork you've created. They'll examine:
1. Days occupied
How many days did you personally use the property vs. how many days was it rented out or available for rent?
Note: Days available for rent count toward income-producing use—but only if the property was genuinely available: listed, actively marketed, reasonably priced.
2. Rental income vs personal use
$30,000 in rental income with 2 weeks personal use clearly suggests income-producing purpose.
$2,000 in rental income with 20 weeks personal use? The ATO will question whether it's actually being used primarily for income.
3. Marketing and availability
Is the property actively advertised? Listed on rental platforms year-round? Is the price competitive for the location?
Listing it once, charging premium prices, and expecting bookings doesn't count as genuinely available for rent.
4. Your overall conduct
Do you take steps to maximise rental income—clean regularly, respond quickly to enquiries, set competitive rates? Or do you just accept bookings when they come?
The ATO looks at whether your behaviour demonstrates an intention to produce income, or is incidental to personal use.
The apportionment principle
If you're in Scenario 2 (primarily income-producing), any period of personal use must be apportioned out of your deductions.
The formula
Days rented or available ÷ Total days in year × Total ownership cost = Deductible portion
Worked example
James — Byron Bay holiday home
Rented out
280 days
Available, unbooked
45 days
Personal use
40 days
Annual interest
$20,000
Calculation
(280 + 45) ÷ 365 × $20,000
Deductible
$17,808
Lost to personal use
$2,192
Counts as personal use
- You stay there
- Family members stay there (with your permission)
- Friends or colleagues use it for free
- You use it for storage, even if no one else is there
Does NOT count as personal use
- Days when the property is being cleaned or maintained for guests
- Days when it's genuinely available for rent but unbooked (as long as it was actively listed)
Common mistakes the ATO sees
"But I hardly use it"
Even 2 weeks per year of personal use can create deduction problems if everything else suggests personal use is the primary purpose. The frequency matters less than the overall pattern.
"I'm advertising it, so all costs are deductible"
Listing a property for rent doesn't automatically make it income-producing if personal use is substantial. The ATO looks at the whole picture.
Mixing up what's deductible
Cleaning costs after guest stays are deductible. General cleaning of the property while you're there for personal use isn't. Many owners claim both without separating them.
Ignoring apportionment
Owners in Scenario 2 forget to apportion. They claim 100% of costs even when they're using the property personally. The ATO will reverse this.
Claiming depreciation without understanding the implications
Depreciation claims reduce your cost base, which increases your capital gains tax when you sell. Many holiday home owners claim depreciation for years, then face a larger CGT bill. Weigh this carefully before claiming.
Worked example: Three different holiday homes
Your next steps
What to do if you own a holiday home
Determine your actual primary purpose
Track your actual usage for a full tax year. Count days rented, days available, days personal. Calculate the percentage.
Review your deductions
If you're in Scenario 2, make sure you're claiming ownership costs (not many owners realise they can), apportioning for personal use days, and separating deductible (cleaning after guests) from non-deductible (your own use) expenses.
Understand your apportionment
If you're claiming depreciation, understand that you'll pay CGT on that amount when you sell. Model the long-term impact before deciding to claim.
Get documentation right
Keep records showing:
The ATO will ask for this. Have it ready.
Plan around the negative gearing changes
From 1 July 2027, negative gearing rules tighten for residential properties purchased after 12 May 2026. Read our article on the 2026–27 Budget tax reforms to understand how these changes affect your rental property strategy.
Real-time compliance
The ATO is tightening scrutiny on holiday home owners. They're seeing claims that don't match documented rental activity, ownership costs claimed despite minimal rental income, and apportionment that ignores personal use. If your return is audited, they'll request booking records, platform statements, calendar evidence and bank statements showing rental deposits.
Talk to Modoras
The line between Scenario 1 and Scenario 2
is blurry. Get advice before claiming.
We can help you assess which scenario applies to your property, calculate proper apportionment, identify deductible vs. non-deductible expenses, model the impact of depreciation claims on future CGT, and ensure your documentation is audit-ready.
Get in touchIf you're considering selling, refinancing, or adjusting your rental strategy, also read our article on how the 2026–27 Budget changes affect property investors, including updates to capital gains tax and negative gearing rules.
This article provides general guidance. Holiday home tax rules are fact-dependent. Your specific circumstances may differ. Please contact us to discuss your situation before claiming deductions.