Holiday home rentals in demand, but beware the financial traps

Holiday home usage and ownership is rising but this can cause problems on the tax and insurance front. Experts share their tips.

Holiday homes will be extra-busy this summer as travel-shy Aussies take breaks closer to home, producing a profitable income source for many owners.

Renting properties to short-term visitors has surged in popularity amid a boom in accommodation-sharing platforms such as Airbnb, but the practice comes with physical and financial traps.

Tax is one of the biggest issues that catches out those looking to lease a room or entire property. As soon as it earns rent, tax will apply.

The Australian Taxation Office says and rental income from a holiday home must be included in your tax return, but deductions can only be claimed for the part of the property used to earn rent and only for when it was “genuinely available for rent”.

“You can’t claim deductions for the proportion of expenses that related to your private use or if it was not generally available for rent, such as when used or reserved for yourself, friends of family,” it says.

KEEP RECORDS

Capital gains tax can also pack a punch, and William Buck business advisory manager Braden Schwark says whether you’re renting out an entire house or a room or two, try to keep detailed records.

William Buck’s Braden Schwark says you’ll have to crunch numbers around a property’s use.

“It’s important to remember that if the property is later sold there may be a level of capital gains tax payable even if the property is your main residence,” he says.

“I’d suggest holiday rental owners summarise their financials on a monthly basis. Keeping track of the associated income and expenses will allow you to claim all the deductions for which you’re entitled and still pay the appropriate level of tax.

“Electricity, water rates, repairs and maintenance all come into consideration. It comes down to calculating the percentage of use and crunching the numbers around that.”

Terri Scheer Insurance says it is increasingly seeing people renting out parts of their private homes as short-term rentals.

“As domestic borders re-open, holiday home owners are tapping into the local holiday market with the ability to target a much larger pool of prospective holiday-makers through Airbnb,” says Terri Scheer Insurance head of niche distribution Carolyn Parrella.

But there are specific risks including theft, damage and legal issues, she says.

“When it comes to holiday homes, landlords are often handing over their keys to complete strangers so it makes sense to protect your investment.”

Carolyn Parrella from Terri Scheer Insurance says security measures are important.

INSURANCE PROTECTION

Landlord insurance premiums are tax deductible, and Terri Scheer Insurance’s most common claims for policies for holiday homes are water damage, tenant damage and loss of rent.

Parrella says people can protect their holiday rental by hiring a property manager who will handle inspections, maintenance and possibly holiday rental bookings.

Keeping a property secure is vital, she says, so consider security alarms, deadlocks on doors and an inventory of all furniture and appliances to help with a potential insurance claim.

“It’s also a good idea to keep the user instructions for all appliances to help guests use them correctly,” Parrella says.

“Look for landlord insurance policies that specifically cover holiday home rentals for tenant damage, theft, loss of rent and legal liability.”

Ashley Manna and Ros Usher own a beachside property that they rent out to visitors when not using it themselves.

“As a short-term rental that is fully furnished and attracts frequent guests, property damage is a risk and accidents can happen,” Manna says.

“We have short stay insurance to protect the property and its contents from damage as well as from a legal liability point of view. There is also property management in place.”

Ros Usher and Ashley Manna with children Caleb and Lachlan. Picture: Tricia Watkinson

THE TAX OFFICE SAYS …

You must apportion your holiday home’s expenses if:

• Your property is genuinely available for rent for only part of the year.

• Your property is used for private purposes for part of the year.

• Only part of your property is used to earn rent.

• You charge less than market rent to family or friends to use the property.

Source: ato.gov.au