Holiday Home vs Investment Property: ATO Rules Before July 2026

This article is general information only and does not constitute financial or tax advice. Consult a qualified tax professional for advice specific to your situation.

If you own a beachside apartment that you rent out on Airbnb most of the year but keep for the family over Christmas and school holidays, you are exactly the type of property owner the ATO is now looking at more closely.

In November 2025, the ATO released three draft guidance documents that change how holiday homes are assessed for tax deductions. The core question is simple: is your property mainly used to earn rental income, or mainly used for your holidays? The answer determines whether you can claim thousands of dollars in deductions, or whether you lose them entirely.

There is a transitional period, but it ends on 30 June 2026. That gives you three months to review your arrangements and make any changes before the full compliance framework kicks in.

What Changed in November 2025

The ATO issued three draft rulings that replace older, less specific guidance:

• TR 2025/D1 covers rental property income and deductions for individuals who are not operating a rental business. It replaces the longstanding IT 2167.
• PCG 2025/D6 sets out acceptable methods for apportioning expenses between rental and private use, including time-based and floor-area-based approaches.
• PCG 2025/D7 focuses specifically on section 26-50 of the Income Tax Assessment Act 1997 and when a holiday home qualifies as a "leisure facility."

The key shift is that section 26-50 is now being actively enforced. This provision has existed in the tax law for years, but the ATO had not previously published detailed guidance on how it applies to properties that are both rented out and used personally.

The Leisure Facility Rule

Under section 26-50, a property is classified as a "leisure facility" if it is used, or held for use, for your holidays or recreation. When that classification applies, you cannot deduct holding costs including:

• Mortgage interest
• Council and water rates
• Land tax
• Insurance
• General maintenance

You can still deduct expenses directly tied to earning rental income, such as advertising fees, platform commissions, and cleaning between guest stays. But the big-ticket deductions disappear.

The exception is clear: if your property is used mainly to produce assessable income at all times during the income year, the leisure facility rule does not apply. That means your rental activity needs to genuinely dominate the property's use, not just on paper, but in practice.

The ATO has stated it will look at how you actually use the property across the whole year, including periods when it sits vacant. Owning a beach house that you list on Airbnb from February to November but keep for the family every December and January could be enough to trigger the leisure facility classification, even if the property is rented for more total days than it is used privately.

The ATO's Traffic Light System

PCG 2025/D7 introduces a risk assessment framework with three zones:

Green (low risk): High occupancy throughout the year, including peak holiday periods. You prioritise rental income over personal use. Minimal private stays. This is the profile of a genuine investment property.

Amber (medium risk): Some personal use, particularly during popular holiday periods. You might forgo rental income during peak season to keep the property available for yourself. The ATO will look more closely at these arrangements.

Red (high risk): You block out peak dates for personal use, set unreasonably high rates during popular periods to deter bookings, respond slowly to enquiries, or impose restrictive booking conditions. The ATO views these behaviours as signs the property is really a personal holiday home, not an investment.

A couple who reserves their Byron Bay apartment for family use over December and January, while listing it at above-market rates the rest of the year and taking days to respond to booking requests, would sit firmly in the red zone.

The key point: listing a property on Airbnb does not, by itself, make it an investment property. The ATO looks beyond calendar availability to assess whether you are genuinely trying to earn rental income.

How Apportionment Works for Mixed-Use Properties

If your property falls outside the leisure facility classification but you do use it privately for part of the year, you need to apportion your expenses between rental and private periods. PCG 2025/D6 outlines two acceptable methods:

Time-based apportionment: Divide the year into days the property was rented, days it was used privately, and days it sat vacant. Expenses are split proportionally based on the rental days versus total days of use. Vacant days typically count as rental if the property was genuinely available for rent during that period.

Area-based apportionment: If only part of the property is rented (for example, a granny flat or a separate room), you apportion based on floor area. This can be combined with time-based apportionment.

Blanket estimates are not acceptable. The ATO expects you to support your apportionment with records: a log of when you used the property, booking records from platforms, and evidence that the property was genuinely available during vacant periods.

This is where tracking matters. If you cannot show the ATO exactly which days were rental, which were private, and which were vacant but genuinely available, your claims are at risk. Recording this in a spreadsheet works, but a purpose-built tool makes it harder to miss days or lose records. propkt's expense tracking lets you tag expenses by property and period, which gives you the documentation you need at tax time.

The Transitional Period Ends 30 June 2026

The ATO has given property owners a grace period. For arrangements that existed before 12 November 2025, the ATO will not review expenses incurred before 1 July 2026. This means you have time to restructure, but not much.

There is an important catch: new arrangements do not benefit from this grace period. If you purchased a holiday property or entered into a new loan after 12 November 2025, the full compliance framework applies immediately.

After 1 July 2026, the ATO will actively audit holiday home deduction claims against the traffic light framework. The stat that matters here: the ATO found that nine out of ten rental property tax returns contained errors, even when prepared by a registered tax agent. Holiday homes are a priority target.

What You Should Do Before 30 June 2026

If you own a property that you both rent out and use personally, here are the practical steps to take before the deadline:

• Assess your usage pattern honestly. Look at the last 12 months. How many days did you use the property? How many days was it rented? Were you available during peak season, or did you block it out?
• Check whether you fall into green, amber, or red. If you are in amber or red, consider whether you can genuinely shift the property towards income production, or whether you need to accept that some deductions will be denied.
• Start keeping a usage log. Record every day the property is used privately, rented, or sitting vacant. Note whether vacant periods were genuinely available for rent with evidence (active listings, reasonable pricing, responsive communication).
• Review your deduction claims with your accountant. The EOFY landlord checklist covers what your accountant needs. For holiday home owners, the apportionment calculation and usage records are now essential.
• Understand the CGT angle. If deductions are denied under section 26-50, those expenses can be added to your property's cost base for capital gains tax. This does not help your cash flow now, but it reduces your tax bill when you sell.

How This Affects Your Rental Property Deductions

For landlords with a clear investment property that is never used privately, nothing changes. Your rental property tax deductions remain the same: mortgage interest, council rates, insurance, depreciation, and repairs are all deductible as normal.

For landlords with mixed-use properties, the impact depends on how the property is used. A holiday house that is rented for 40 weeks and used by the family for 4 weeks, with 8 weeks vacant but genuinely available, will still qualify for apportioned deductions. You claim the rental share of holding costs and the full amount of direct rental expenses.

But a holiday house that is rented for 30 weeks, used by the family for 10 weeks (including all of Christmas, Easter, and school holidays), and priced to deter bookings during those peak periods could be classified as a leisure facility. In that scenario, you lose deductions for interest, rates, and maintenance entirely.

Use the depreciation calculator to understand how much depreciation you could be claiming on a fully investment-focused property, and the rental yield calculator to see what your property actually returns once you factor in the expenses you can and cannot deduct.

Frequently Asked Questions

Can I claim tax deductions on a holiday home that I also rent out?

Only if the property is used mainly to produce rental income at all times during the income year. If the ATO classifies it as a leisure facility under section 26-50, holding costs like mortgage interest, council rates, and land tax are denied. Direct rental costs like cleaning and advertising remain deductible.

What is the ATO's July 2026 deadline for holiday home owners?

The ATO will not review expenses incurred before 1 July 2026 for arrangements that existed before 12 November 2025. After that date, the full compliance framework in TR 2025/D1 and PCG 2025/D7 applies, and the ATO will actively audit claims against its risk assessment criteria.

What is the difference between a holiday home and an investment property for tax purposes?

An investment property is held mainly to produce rental income. A holiday home is used, or held for use, for the owner's holidays or recreation. The distinction determines whether holding costs like interest and rates are deductible.

Does listing my property on Airbnb guarantee tax deductions?

No. The ATO looks beyond calendar availability. If you block out peak holiday periods for personal use, set unreasonably high rates to deter bookings, or respond slowly to enquiries, the ATO may treat the property as a leisure facility and deny deductions.

What happens to denied deductions on a holiday home when I sell?

Expenses denied under section 26-50 can be incorporated into the property's cost base for capital gains tax purposes. This reduces your taxable capital gain when you eventually sell.

Tracking which days your property is rented, vacant, or used privately is the foundation of getting holiday home deductions right. propkt helps you log every expense by property and period, so when the ATO asks for your records, you have them. Get started free.