14th Dec, 2010
Its holiday season again and the time we take a drive to that little bit of Australia we want to be ours. So we look at the real estate agents windows, just dreaming of the thought, but then we see something we could afford or will find a way to afford.
Holiday houses are great places to relax and disconnect from the busyness of life. They are also assets that have complicated tax consequences that need to be understood and recorded.
You should continue to maintain complete records of the purchase of the property and of property income and expenses, substantiated with receipts and/or statements where applicable.
You also need to take into consideration which entity to buy the property in. Do you buy it in a family trust or personal names? jointly or singularly? Because you already have (assumed) your home as your main residence you will need to form a strategy in line with your short term use and long term use expectations. These may include you wanting to retire there and make it your primary residence in the future. All this effects your tax implications.
In short, speak to Scott Partners first if you feel you need to buy the property or, buy the property with “and/or nominees” marked in the purchasers details so the correct entity or person/s can be registered as the purchaser by settlement of the property.
Claiming expenses
Due to the often private nature of holiday houses, the Taxation Office pays special attention to the eligibility of the expenses to be claimed in the owner’s income tax return.
The expenses from a holiday house can only be claimed in your income tax return if they are incurred when the property was rented or ‘available for rent’.
For a holiday house to be available for rent, the owner must demonstrate that steps have been taken to rent the property at market rates. This can include evidence that the property was listed with a real estate agent, or advertising material aimed at attracting prospective tenants has been circulated. Holiday houses that are listed with a real estate agent at inflated prices are not considered available for rent. It may also be necessary to adjust the rent for seasonal factors.
Staying at your holiday house even when no tenants are booked in for the property will result in the house not being available for rent for those days. In this situation the expenses (such as interest) will have to be apportioned. This is the case even if you are undertaking repairs and maintenance.
Apportioning expenses involves considering the number of days it was rented or available for rent over the entire year and only claiming the relevant portion of the expenses. For example, say the total interest incurred on the mortgage was $6,800. You stayed at your holiday house 20 days over the year, with the remaining days (345) the property was either rented or available for rent. The deductible claim for interest would be reduced to:
$6,800 x 345/365 = $6,427
Expenses that cannot be claimed
Holiday house expenses that are not deductible include the cost of acquiring and disposing of the property, initial repairs and improvements to a property. Such improvements include renovations, extensions and alterations. Replacing an entire structure will also not be claimable. We recommend you maintain a detailed account of significant repairs made to your holiday house to assist in the preparation of your income tax return.
Expenses that are associated with buying or selling the house may instead form part of the cost of the property for Capital Gains Tax purposes, thereby reducing the capital gain on sale. Improvements may be claimed over number of years if the house is being rented or is available for rent.
Sale of Holiday Houses
A holiday house is generally not your main residence and therefore is likely to be subject to capital gains tax. Any proceeds resulting from the eventual sale of the holiday house after deducting its cost base will be assessable to you if the house was purchased after 20 September 1985.
The costs of buying and selling your property can be taken into account when calculating any capital gain or loss. These costs include conveyancing, advertising, legal fees, stamp duty on the transfer, valuation fees and real estate agents’ commissions.
If the property is held for more than one year you may be able to take advantage of the 50% capital gains tax discount. This means that only 50% of any capital gain is taxable. This is only eligible to property held in personal names or trusts.
Costs of ownership
Expenses incurred that relate to the continuing ownership of a holiday house can also form part of the cost base of the property when it is sold.
Costs of ownership expenses include interest on funds borrowed to acquire the house, rates, insurance, maintenance and repairs, borrowing cost etc. These costs may be added onto the cost base of the holiday house and therefore reduce the capital gain on sale. This is available if these expenses were not claimed against the rental income from the property and the property was purchased after 20 August 1991.
