We all understand the importance of having a break away from work, and for many of us, that also means escaping from home too.
Depending on whether you are the explorer type,who likes to visit new or exotic destinations abroad, or a comfortable and convenient traveller who likes to stick to a 1.5 hour drive from home. Many people fall in love with a town which they like to also call home.
Home away from home, holiday house, weekend getaway call them what you like, but there are some important things to think about.
Firstly, will the property just be for your exclusive use, or perhaps you’ll allow family or friends, or will you extend it to also include strangers?
Like most things in life, there are pro’s and con’s.
Keeping a place just for yourself (and perhaps family) is a great option to give you flexibility for a spontaneous getaway and means you can leave things set up how you like it.
For many people their finances may not allow as much freedom and getting some rental income might make your dream happen. But the obvious drawback is that you will have someone else using your stuff, you can’t leave personal or valuable there, and your tenants most likely want to use the property at the same time you want to.
A holiday house at say Rye for you and the kids to use during the school holidays, is also the peak time for rental, so preventing it being rented when you are using the house means you most likely are denying yourself of thousands of dollars.
And of course, as soon as you start talking about having a good time, the fund police (AKA Tax Office) like to crash the party.
There are 2 important tax considerations to be aware of. Firstly, your holiday home is unlikely to qualify as your Primary Place of Residence. Either by virtue of you owning 2 properties, or by your infrequent occupation of the holiday home. This means your holiday house will be subject to capital Gains Tax when sold.
So it’s important that you keep details of all your costs, such as the original purchase contract, stamp duty, improvement costs, council rates, insurance, water rates etc. All of these costs help to reduce the amount of capital gains tax on holiday homes along with the interest on your mortgage of course.
Besides capital gains tax, you will need to worry about income tax should you rent out the holiday home.
For partial rental, partial holiday home, you will need to apportion all of the expenses between the period of time the property is available for rent and not available for private use.
Whilst splitting thing on a per day basis sounds simple, the ATO take a dim view of you occupying a holiday home during say all of the school holidays and then making the house ‘available to rent’ during this period of time when it is unlikely to generate income. This is where the fun police come back and say, if you deny yourself the peak income periods, don’t ask for a tax break.
There is a lot of ATO guidance on these matters and your GNS Group Accountant Ivanhoe can assist you in these matters.
If you live in Ivanhoe near Melbourne, Talk to us today to get the best understanding of how holiday homes work.