ATO releases finalised guidance on deductions for holiday homes

The guidance also explains how to apportion deductions when there are income-producing and non-income-producing periods, and when deductions for a holiday home will be denied.

The ATO said the update applies to the short-term rental market, such as those available on online booking or sharing platforms, as well as long-term rentals.

"The short-term market includes renting out a room in a main residence and renting out entire houses and holiday homes," it said.

"A holiday home refers to property that is used, or held for use, by your clients for holidays or recreation, or the recreation of their family members and friends."

The new guidance outlines that clients who want to claim deductions for a rental property that doubles as a holiday home must ensure the property is mainly used to earn assessable income.

"If the property isn’t used primarily to earn assessable income, your clients won’t be able to claim deductions, including for ownership or use expenses," the ATO said.

"This includes interest expenses, council and water rates, body corporate fees, capital works and decline in value. Only expenses such as advertising costs, cleaning costs after a guest stay and booking fees and commissions will be deductible."

The Tax Office said that if the holiday home is used mainly to produce income, but there's a small portion of private use, then clients can claim a deduction.

A small portion of private use, it said, was defined as a week or a few weekends in the off-season, where there was no booking or a very low chance of a booking.

"The expenses must be apportioned, and they can’t claim for the period of private use."

PCG 2026/2 sets out a time-based method for apportioning deductions on a fair and reasonable basis, based on the days the property was used or held for the production of income.

"In determining the days held to produce income, whether your property is available for rent on commercial terms (for the periods that your property is unoccupied) will depend on the facts and circumstances."

PCG 2026/2 said factors that indicate, on an objective analysis, that a property is available for rent on commercial terms include:

• It is advertised in ways which gives it broad exposure to potential tenants.
• The rental terms, including the rental rate, are similar to comparable properties in the same area.
• Requests to rent the property are actively monitored.

"Where you are renting out a room in your home, the number of days your property is unoccupied but available for rent on commercial terms will be zero. This is because when a room in your home is not being rented out, it is treated as being used privately as part of your home and is not considered available for rent on commercial terms," the ATO said.

The guidance also sets out an area-based method for apportioning expenses where only part of a property is rented out to a tenant or used to produce income.