If you’re considering renting out a second home or holiday house, there are a number of financial factors your need to be aware of.
This includes everything from availability of the home, to management, repairs and certain tax implications that come with renting out a property.
Here’s some things to think about before you rent your home to holidaymakers.
It’s a good idea to keep clear records of all your activity from the very start of your investment journey.
These records can include evidence of expenses, the date and cost of the property, all repairs or changes to the property (e.g. subdivisions, partial sales, etc.), and all depreciations.
If you are a co-owner of the property, you may also need to keep a clear record of how much interest each owner holds in the property.
You should keep records of any rental-related income you and/or your partner(s) receive.
The ATO are looking closely at deduction claims for repairs on rental properties.
The ATO are in the process of sending out letters to more than 1000 rental property owners who have incorrectly claimed for repairs to already existing damages.
Therefore, as soon as you start looking for a property, make sure to take into account repairs that may be needed to make it suitable for renting.
A spokesperson from the ATO says a common mistake property investors make is thinking they can claim a deduction on their tax from repairs to defects that existed prior to purchase.
“It’s important for taxpayers to understand they are not entitled to claim a deduction for repairs to their rental property for issues that existed when they purchased it, even if they carried out these repairs to make the property suitable for rent,” the ATO spokesperson says.
“The cost of these repairs is instead used to work out any profit, or capital gain, when the property is sold.”
Licensed financial adviser and mortgage broker, Bruce Brammall says any major improvements made in the first year will be seen as a capital expense, rather than an ongoing expense in the eyes of the ATO.
Will the property be available in peak times?
Brammall says you should avoid using it yourself during peak times of popularity, including summer holidays and other school holiday periods.
“Even though you are only there for two days, essentially you stop someone staying there for a week,” Brammall says.
Brammall says the ATO may consider this a reason to refuse a week’s worth of deduction on expenses.
If you were to stay during all of the peak times, the ATO could conclude that you had lost up to half your potential yearly earnings, and could reject half of your yearly deductions.
Late last year, the ATO began to focus on preventing holiday home owners from claiming more deductions than they were entitled to.
They sent letters to more than 500 postcodes across the country to remind property owners to only claim for periods where the properties were genuinely available for rent.
A spokesperson for the ATO says the majority of those that received a letter during this period have lessened their claim.
Finding an accountant
Finding the right accountant can really help.
Brammall says the differences between a good and a bad accountant are often hard to see, especially if you’re just starting out as an investor.
“If you are a novice yourself, it can be very difficult to pick an accountant who knows property well versus one that does not,” he says.
He says it’s a good idea to ask family or friends who have experience in property investment as to which accountants they’ve done business with, and which ones they trust with their activities.
When researching for an accountant let them know your situation and ask them what their general plan of action would be to assist you towards your goals.
Before you make any decision about the purchase of a new property, you should always seek the advice of a qualified financial advisor.