No longer can holiday home owners claim lucrative tax deductions (such as rates, interest and insurance) if they block out peak holiday periods for personal use. The Australian Tax Office (ATO) tightened the tax deduction rules for holiday homes. It withdrew the previous rules on 12 November 2025, so you now have to prove the property is commercially available for rent as its primary use. This affects you if you own a rental that doubles as a holiday home.
What is the primary use of your rental property?
Previously you could claim deductions for expenses during the time you made the property available in the rental market even if you never rented it out. But you had to prove you made legitimate efforts to tenant the property. Those days are over.
The core question is – Do you use the property mainly to earn income?
The new ATO guidelines overturn a 40-year ruling and replace it with two Practical Compliance Guidelines, PCG 2026/2 and PCG 2026/3, and a new Taxation Ruling, TR 2026/1. These control when the tax office stops treating your holiday home as an income earning investment and flags it as a private investment. For example:
1. Primary role is a rental investment. When you genuinely rent your holiday home out for most of the year, you can claim ownership costs like expenses, interest, rates, etc. But if you, your family and friends use it in the off season for a few weeks when there are no bookings, you cannot claim the expenses during those periods. You have to apportion your claim to exclude private use from what you claim as a tax deduction.
2. Primary role is as a holiday home. If the primary use of your holiday home is for recreation for you, your family and friends, there is a significant tightening of the rules. You cannot claim ownership costs such as the decline in value, rates or interest. You can now only claim deductions for the costs associated directly with the rental of the property. These include advertising, platform commissions and cleaning fees for guest stays.
The new rules apply to short-term and long-term rentals, so this means the ATO is scrutinising online sharing and booking platforms, and includes the following:
· Properties rented over the long term.
· Leasing out whole recreational properties or holiday homes.
· Leasing a spare bedroom in your house using an online sharing app.
Keeping records
The ATO is not going to spend compliance resources on meeting the new requirements for the year ending 30 June 2026 or earlier. However, if you own a holiday home you should keep good records that include:
· Details of private and rental use.
· Confirmation that you priced the rent at market value.
· Proof of accepting and rejecting rental bookings.
· Evidence that you did not block out times for personal use during peak holiday periods.
Do not let the new tax rules dictate the decisions you make about the use of your holiday home. If you bought it to enjoy, then concentrate on making priceless memories with your family rather than worrying about how much you can claim as tax deductions.
Talk to Ben about the new ATO guidelines for holiday homes and how you can financially maximise your investment.