New Guidance for Rental Properties and Holiday Homes

 

 

ATO finalises new guidance on rental properties and holiday homes — what property owners need to know

 

The ATO has now finalised its guidance on rental properties and holiday homes through TR 2026/1, PCG 2026/2 and PCG 2026/3.

This is an important update for anyone who owns a residential rental property, particularly where the property is also used personally, used by family or friends, or made available as short-term accommodation through platforms such as Airbnb or Stayz.

The key message is simple: if a property is not genuinely being used to earn rental income, or if it is partly used privately, deductions may need to be reduced — and in some cases, denied altogether.

The ATO has stated that the guidance applies to both long-term rentals and the short-term rental market, including holiday homes and rooms rented through online booking platforms.

 

What has changed?

The ATO’s finalised guidance confirms how it will approach:

1. When rental income is assessable
2. When rental expenses are deductible
3. How deductions should be apportioned where there is private use
4. When holiday home deductions may be denied under section 26-50 of the Income Tax Assessment Act 1997

 

TR 2026/1 replaces the older ATO ruling IT 2167 and sets out the ATO’s current view on rental property income and deductions for individuals who are not carrying on a rental property business.

The bigger issue is for holiday homes. The ATO now takes the view that some holiday homes can be treated as a “leisure facility” where they are used, or held for use, for holidays or recreation by the owner, family or friends. Where section 26-50 applies, ownership-type deductions may be denied unless an exception applies.

 

Why holiday homes are now a higher-risk area

A holiday home is not automatically treated the same as a normal rental property.

If the property is used privately, blocked out for owner use, offered to family or friends at a reduced rate, or not genuinely available for rent on commercial terms, the ATO may reduce or deny deductions.

This can affect deductions such as:

• Interest on borrowings
• Council and water rates
• Body corporate fees
• Insurance
• Repairs and maintenance
• Capital works deductions
• Decline in value deductions

 

The ATO has indicated that where a holiday home is not mainly used to earn assessable income, this ownership and holding costs may not be deductible. However, direct costs connected with earning rental income, such as advertising, booking platform fees, commissions and cleaning after guest stays, may still be deductible.

 

What does “mainly used to earn income” mean?

This will depend on the facts. The ATO will look at the overall use of the property, including whether it is genuinely available for rent on commercial terms. Relevant factors may include:

• Whether the property is advertised broadly
• Whether the rent is set at a commercial market rate
• Whether booking requests are actively monitored
• Whether unreasonable restrictions are placed on guests
• Whether the property is blocked out during peak holiday periods for private use
• Whether the property is used by family or friends for free or at a discounted rate

 

PCG 2026/2 provides the ATO’s compliance approach to apportioning rental property deductions where a property is used for both income-producing and non-income-producing purposes. The guidance refers to a time-based method based on the days the property is used or held for income-producing purposes.

 

Common examples where deductions may be reduced

Property owners should review their position if:

• They use the property for personal holidays
• Family or friends stay for free or below market value
• The property is only available for rent outside peak periods
• The property is advertised at an unrealistic rent
• The property has limited availability or restrictive booking conditions
• The property is left vacant but not genuinely available for rent
• They rent out part of their main residence

 

Where a property is partly used privately, deductions generally need to be apportioned. This means owners cannot simply claim 100% of the property expenses where part of the year, or part of the property’s use, relates to private purposes.

Transitional ATO approach before 1 July 2026

Importantly, the ATO has adopted a transitional compliance approach.

Commentary on the final guidance notes that the Commissioner will generally not devote compliance resources to reviewing whether section 26-50 applies to holiday home expenses incurred before 1 July 2026, except where there is evidence of avoidance, fraud, evasion or inappropriate use of the transitional approach.

This gives affected taxpayers a short window to review their arrangements before the ATO’s position is more actively applied from 1 July 2026.

 

What property owners should do now

If you own a rental property or holiday home, now is the time to review your records and how the property is used.

You should consider:

• How many days the property was rented
• How many days it was genuinely available for rent
• How many days it was used privately
• Whether rent was charged at market rates
• Whether family or friends used the property
• Whether the property was blocked out during peak periods
• Whether your expenses have been correctly apportioned
• Whether your records support the deductions claimed

 

For short-term rental and holiday home owners, the focus should be on evidence. Keep records of booking calendars, advertisements, nightly rates, blocked-out periods, guest stays, cleaning records, booking platform statements and details of any private use.

 

Main residence warning

There can also be capital gains tax implications if you rent out part or all of your main residence.

For example, if you rent out a room, granny flat or your home while you are away, this may affect your ability to claim the full main residence CGT exemption in the future. This is a separate issue from the rental deduction rules, but it should be reviewed before making your home available for short-term accommodation.

 

Final thoughts

The ATO’s finalised guidance confirms that rental property and holiday home deductions remain a focus area.

For ordinary rental properties, the key issue is ensuring expenses are properly connected to rental income and apportioned where required.

For holiday homes, the issue is more significant. If the property is not mainly used to earn assessable income, deductions for ownership and holding costs may be denied.

With the transitional period ending on 1 July 2026, property owners should review their position now rather than waiting until tax time.

 

If you own a rental property, short-term accommodation property or holiday home, please contact us to review your position and ensure your deductions are correctly claimed.