Holiday Home Owners: Major Tax Changes Ahead

If you own a holiday home, or are considering purchasing one, two recent developments could significantly impact your tax position.

The Australian Taxation Office (ATO) recently released new guidance on holiday home deductions, while the Federal Government announced changes to negative gearing for future property purchases.

While these measures were introduced for different reasons, together they create an important shift for holiday home owners and investors.

A Significant Change to Holiday Home Tax Deductions

The ATO's new ruling represents a major change in how holiday home deductions will be assessed from 1 July 2026.

Historically, owners could generally claim deductions for periods when a property was genuinely available for rent, even if it remained vacant. The key consideration was whether reasonable efforts had been made to rent the property.

Under the new approach, the ATO will look beyond simply how many days a property is advertised and focus on how the property is actually used throughout the year.

Particular attention will be given to peak demand periods such as:

• Christmas and New Year

• Easter

• School holiday periods

• Other high-demand seasonal periods

  
  

Where owners reserve these peak periods primarily for personal use, the ATO may determine that the property is predominantly a lifestyle asset rather than an income-producing investment.

What Expenses Could Be Affected?

For properties that fall into what the ATO describes as its higher-risk category, deductions for ownership costs may be denied entirely.

These costs include:

• Mortgage interest

• Council rates

• Insurance

• Repairs and maintenance

• Other ongoing holding costs

Importantly, direct expenses relating to actual rental activity, such as advertising and guest cleaning costs, will generally remain deductible.

Who Is Most Likely to Be Impacted?

The changes are not primarily aimed at commercial short-term accommodation operators who actively seek to maximise occupancy and treat their properties as genuine income-producing investments.

Instead, the focus is on properties that:

• Are used regularly by the owners and their families;

• Are only rented occasionally throughout the year; and

• Have historically claimed deductions based on limited rental activity.

  
  

A common example may be a family holiday home that is rented out several times each year but is reserved for personal use during peak holiday periods.

How Do the Negative Gearing Changes Fit In?

Separately, the Federal Budget announced the removal of negative gearing concessions for future purchases of established properties.

While these reforms were largely aimed at housing affordability and rental supply, they may have unintended consequences for holiday home ownership.

As a result, owners may find themselves affected by both the ATO's new deduction rules and broader property tax reforms.

What Should Holiday Home Owners Do Now?

The good news is that the ATO has been relatively transparent about its expectations and has introduced a traffic light framework to help owners assess their position.

Green Zone

Generally applies where:

• Rental income is the primary purpose of the property;

• Personal use is minimal;

• Peak rental periods are made available to paying guests; and

• Owners actively seek to maximise occupancy.

Amber Zone

Applies where circumstances are less clear and additional evidence may be required to support claims.

Red Zone

Generally applies where:

• Significant personal use occurs during peak periods;

• Rental activity is limited; and

• The property functions primarily as a family holiday home.

  
  

Our Recommendation

If you own a holiday home, now is the time to review how the property is being used and whether your current tax treatment aligns with the ATO's new expectations.

The changes do not mean owners should immediately consider selling their property. However, they do mean that many owners should revisit their tax strategy with your accountant now, rather than when your tax returns are being prepared.

Understanding where your property sits within the ATO's framework can help avoid surprises and ensure you are claiming deductions appropriately.

If you'd like assistance reviewing your holiday home arrangements or understanding how these changes may affect you, please contact the Sullivan Dewing team.