Is your holiday home / rental property going to cost you more now!
ATO proposed changes to your holiday home / rental property.
If you reserve your holiday home / rental property for your family during Easter, Christmas, or the school holidays (peak rental periods) or you only rent it out intermittently you could face some changes to your rental property deductions.
Draft Tax Ruling TR 2025/D1: Holiday Home Deductions in the Spotlight
The Australian Taxation Office (ATO) has released a new draft ruling – TR 2025/D1 – that significantly tightens the rules on claiming tax deductions for holiday homes. In plain terms, if you own a rental property that you also use for your own holidays or weekends away, you may no longer be able to claim many of the expenses you’re used to. This draft ruling clarifies that when a rental property is deemed a “holiday home” (because of personal use by you, your family or friends), the ATO will deny deductions for a range of holding costs like interest on loans, council rates, insurance, and maintenance unless you can show the property was mainly used to produce rental income. All rental income still has to be declared as normal – but the tax breaks for expenses will be much more limited for those with personal use of the property. This marks an important change aimed at preventing people from enjoying a private holiday house at taxpayer expense, and it’s more restrictive than previous guidance from the 1980s on this topic.
What counts as a “holiday home”? Under the new draft rules, a property is considered a holiday home if you use it (or hold it ready) for your own recreation at any time – even if it’s also rented out occasionally. It’s a matter of how the property is used over time. For example, if you reserve the home for your family during Easter, Christmas, or school holidays (peak rental periods) or you only rent it out intermittently, the ATO is likely to view it as a leisure facility primarily for private use rather than a genuine full-time investment property. Once a property falls into the “holiday home” category, Section 26-50 of the tax law kicks in, treating it like any other leisure facility (similar to a boat or sports club facility). This means any expenses related to owning or holding the property – such as your mortgage interest, property rates, land tax, and even repairs – cannot be claimed as deductions to the extent of your private use. Only the expenses directly related to renting it out, like advertising, booking platform fees, cleaning after guests, or property manager commissions, remain deductible. In short, the ATO’s view is: if the property’s primary purpose is your personal enjoyment, you can’t get tax relief for the costs of that enjoyment.
Key changes and clarifications: This draft ruling replaces older guidance (over 40 years old) and reflects the ATO’s stricter stance in the era of Airbnb and holiday rentals. The major clarification is that apportioning expenses based on rental vs private use is not enough if the property overall is mainly used as a holiday home. Previously, many holiday-home owners would apportion expenses (claiming a percentage of costs equal to the rental time). Under TR 2025/D1, the ATO says if your personal use is substantial, most holding costs could be completely non-deductible, not merely reduced proportionally. The only way to fully retain your deductions is to ensure the property’s main use is as a rental (for example, making it available for rent year-round, especially during peak seasons, and not using it for yourself except perhaps very minimally). The ruling also emphasizes a “common sense” factor-based approach: it’s not just the number of days rented vs used privately, but when and how you use the property. If you only rent it in off-peak times or place heavy restrictions that effectively discourage renters, the ATO will likely conclude the property isn’t truly intended to earn income. On the flip side, if you do occasionally stay at the property but make sure renters get priority during all high-demand periods, price it reasonably, and actively accept bookings, you might demonstrate that earning income is the main objective, potentially qualifying for an exception to the denial of deductions. In essence, the burden is now on owners to prove “investment first, lifestyle second” – otherwise the tax benefits shrink considerably.
Implications for owners: This new stance could have a big financial impact on individuals with holiday homes. These rules fundamentally change the economics of owning a part-time rental property. If you’ve been claiming loan interest and other expenses for a holiday house that you also enjoy yourself, you might see your allowable deductions dry up, leading to higher taxable income (and reducing or eliminating any tax losses/negative gearing benefits you used to receive). It’s effectively a crackdown: the ATO doesn’t want taxpayers subsidising someone’s personal holiday lifestyle. TR 2025/D1 is much stricter than the old guidance and will require affected owners to rethink their approach. Owners will need to be more diligent: keep clear records of when the property was rented vs used by family or friends, ensure any rental advertising is genuine (market-rate pricing, no unreasonable blackout dates), and be prepared to show the ATO that you’re not trying to have it both ways.
Timing and next steps: Remember, TR 2025/D1 is currently a draft issued for public comment (with a comment deadline of 30 January 2026). The ATO has acknowledged that this is a new interpretation – so they are giving taxpayers time to adjust. There’s a transitional period: the ATO has stated it won’t devote compliance resources to challenging holiday home deductions before 1 July 2026 for arrangements that were in place prior to 12 November 2025 (the release date of the draft). In practice, this means owners have a bit of a grace period to review their situation and make changes going forward. The final ruling, once it’s officially implemented (likely effective from the 2026–27 financial year onwards), will then apply. Now is the time for holiday home owners to assess their property usage. If you love using your beach house or country cottage for family getaways, you’ll need to realise that from 2026 on, you probably can’t claim the running or holding costs on your tax like you used to. If the tax benefits are important to you, you may need to either increase the rental usage of the property (and limit personal stays), or accept that the property will be treated as a purely private asset with minimal tax relief. On the other hand, if you’ve been operating a holiday rental truly as a business-like investment, these clarifications simply reinforce good practice – continue to keep it available and attractive to renters, document everything, and you should continue to be able to claim your expenses appropriately.
Bottom line: If you own a holiday home or short-term rental property, pay close attention to TR 2025/D1. It brings a new level of scrutiny to how you use your property. Make sure you document your usage, the ATO’s message is clear: private enjoyment and tax deductions don’t mix well. By planning ahead – either limiting your personal stays or adjusting your tax planning – you can avoid unpleasant surprises when these rules take effect.
