ATO Holiday Home Rules: What Owners Can Still Claim in 2026

Short answer: under the ATO’s new guidance (TR 2026/1 and PCG 2026/3, issued 20 May 2026), a holiday home you also rent out only keeps its ownership deductions, such as interest, rates, body corporate fees and depreciation, if it is mainly used to earn rent at all times in the income year. If it is not, only rental costs such as advertising, cleaning after guests and booking commissions stay deductible. The ATO’s compliance focus applies to expenses from 1 July 2026, so this summer is the first peak season that counts.

Key takeaways

• A holiday home is a property used, or held for use, for your own holidays or those of family and friends who stay free or at a reduced rate.
• If it is not mainly used to produce rent, section 26-50 of the tax law denies deductions for owning it: interest, council and water rates, body corporate fees, capital works and decline in value.
• The ATO looks at actual use, not your intention, with special weight on school holidays, public holidays and peak seasonal demand.
• Blocking out Christmas or Easter for family use each year is a listed red zone feature that may lead to an audit.
• The ATO says it will not put compliance resources into expenses incurred before 1 July 2026, so the 2026 to 2027 income year is the first one tested.

What changed with the ATO’s holiday home guidance?

On 20 May 2026 the ATO published Taxation Ruling TR 2026/1, its view on rental property income and deductions for individuals who are not in business. It replaces the old ruling IT 2167, which the ATO has withdrawn. Two practical compliance guidelines were issued on the same day: PCG 2026/3 on holiday homes and PCG 2026/2 on apportioning rental deductions.

The big shift is how the ATO applies section 26-50 of the Income Tax Assessment Act 1997. That section stops deductions for a “leisure facility”, and the ATO now says plainly that a holiday home you also rent out is one, unless an exception applies. The ATO describes the purpose of the rule as stopping owners getting a tax subsidy for what is really spending on their own recreation.

What counts as a holiday home for tax?

TR 2026/1 defines a holiday home as a property that is used, or held for use, for your holidays or recreation, or for the holidays of family members and friends who pay no rent or a reduced rate. That covers the classic beach house or snow cabin, but also an apartment in a tourist area that the family stays in a few times a year.

A property you rent out and never use yourself is not a holiday home under this test, even in a holiday town. The ruling’s own example of an apartment used only for rental reaches that result.

Which deductions are lost if the property is not mainly rented?

If the exception does not apply, the ATO’s guidance for tax professionals says owners cannot claim expenses for owning or using the property, including:

• interest on the loan
• council and water rates
• body corporate fees
• capital works deductions
• decline in value (depreciation of fittings)

Rent received is still taxable. The ATO also says denied ownership costs may form part of the property’s cost base, which matters for capital gains tax when you sell. Our guide to capital gains tax for property investors explains the cost base.

Which expenses can you still claim?

Costs that relate to renting the property out, rather than owning it, remain deductible to the extent they earn income. The ATO names advertising costs, cleaning after a guest stay, and booking fees and commissions charged by a platform. In the ruling’s examples, owners whose ownership deductions were denied could still claim 100% of the platform’s service fees.

How does the ATO decide if a holiday home is mainly rented?

TR 2026/1 says the test does not depend on your subjective intention. The factors it lists are:

• the way the holiday home is actually used
• the time it is dedicated to earning income
• the time it is used privately, or held for possible private use
• how far it is actually available or rented at times when holiday properties are in demand, such as school holidays, public holidays and peak seasonal periods

The test must be met “at all times” during the income year, or for a clear part of it. The ruling gives an example of an owner whose beach house became a genuine rental from 1 January after a clear change in circumstances: deductions were available from that date, apportioned for any private use.

What are the ATO’s green, amber and red zones?

PCG 2026/3 sorts holiday homes into three risk zones. This is how the ATO decides where to spend its compliance effort, not a law in its own right.

Green zone (low risk)

• High income producing occupancy, especially in school holidays, public holidays and peak seasons
• Limited personal or other non commercial use
• Income put ahead of other purposes
• Commercial terms for renting it out
• Real attempts to maximise rental income

Amber zone (medium risk)

• More personal use by the owner and friends, free or below market rates
• Giving up bookings so the property stays free for personal use
• Personal use, or holding it free, during peak holiday times
• Limited attempts to rent it out

The ATO says it may apply compliance resources to arrangements in this zone.

Red zone (high risk)

• Times blocked out for personal use each year, particularly peak holiday periods
• Limited attempts to rent the property
• Major features or parts of the property locked away from guests
• Unreasonable restrictions on guests that keep occupancy low
• Little or no attempt to lift occupancy

For red zone arrangements the ATO says it will look further as a matter of priority and may proceed to audit.

Citadel’s peak period self check

Our team built this short checklist from the ATO’s own wording so owners can see where a property may sit before the summer holidays. It is not a substitute for advice from a registered tax agent.

1. Peak weeks. Write down the school holidays, public holidays and local peak season for the area. Is the property listed and bookable for all of them?
2. Your own use. Count the nights you, family or friends will stay free or at a discount this income year, and when. Any nights in peak weeks are the ones the ATO flags first.
3. Blocked dates. Check the booking calendar for dates held back “just in case”. The ATO counts property held for possible private use, not only nights you actually stay.
4. Whole property available. Note any locked rooms, owner’s storage or features guests cannot use.
5. Commercial terms. Compare your nightly rate, minimum stay and house rules with similar listings. Restrictions that keep occupancy low are a red zone feature.
6. Records. Keep the listing history, booking calendar, rent received, private use dates and receipts for each expense, so the use can be explained if the ATO asks.

If most answers point to genuine rental with small off peak private use, the ruling’s examples suggest ownership costs stay deductible, apportioned for the nights you use it. If answers point the other way, ask your tax agent before claiming ownership costs for 2026 to 2027.

What if you only use the holiday home now and then?

The ATO’s professional guidance says that a small amount of private use, for example a week or a few weekends in the off season when there was no booking or little chance of one, does not stop the claim. The expenses must still be apportioned and you cannot claim the private use period. PCG 2026/2 sets out a formula for that apportionment based on the days the property is used or held for income.

How does this sit with the other 2026 tax changes?

The holiday home rules are separate from the negative gearing changes legislated on 26 June 2026, which start on 1 July 2027. A holiday home that loses ownership deductions under section 26-50 has a smaller rental loss to deal with in the first place. Our explainer on negative gearing changes from 1 July 2027 covers that reform, and our guide to investment property deductions covers the costs a normal long term rental can claim.

What should holiday home owners do now?

• Read the ATO’s examples in TR 2026/1 that look most like your situation.
• Decide before the summer school holidays whether the property is mainly a rental or mainly a family retreat, and set the calendar to match.
• Keep records from 1 July 2026 onward, as that is the period the ATO has said it will review.
• Speak with a registered tax agent before lodging your 2026 to 2027 return.

If you are weighing up a property in a holiday area as a long term investment, Citadel Agency is a licensed buyers agency (licence 092247L) and our due diligence checklist shows what we review before buying. Want to talk through your plan? Book a free strategy call with our team.

Frequently asked questions

Can I claim interest on a holiday home I rent out?

Only if the property is mainly used, or held for use, to earn rent at all times in the income year, and then only for the income producing share. If it is mainly a holiday home for you or family, the ATO says interest is not deductible under section 26-50.

When do the ATO holiday home rules start?

TR 2026/1 and PCG 2026/3 were issued on 20 May 2026. The ATO has said it will not devote compliance resources to section 26-50 for expenses incurred before 1 July 2026, so the 2026 to 2027 income year is the first one it will review.

Can I still use my holiday rental over Christmas?

Using or blocking out the property during school holidays, public holidays or peak season is the main feature the ATO lists for the amber and red risk zones. Off season private use when there is little chance of a booking is treated very differently.

What can I claim if my holiday home deductions are denied?

Costs of renting it out rather than owning it, such as advertising, cleaning after guests, and booking fees and platform commissions, remain deductible. Rent received is still taxable.

Does this apply to a short stay apartment I never use?

A property you never use, or hold for use, for your own holidays or for family and friends at a reduced rate is not a holiday home under TR 2026/1, so section 26-50 does not apply to it.

Sources

• ATO, TR 2026/1 Income tax: rental property income and deductions for individuals who are not in business (20 May 2026)
• ATO, PCG 2026/3 Holiday homes that you also rent out: ATO compliance approach (20 May 2026)
• ATO, PCG 2026/2 Apportionment of rental property deductions
• ATO, New guidance for rental property owners

General information only. It does not take into account your objectives, financial situation or needs. Speak to a qualified professional before acting.

General information only. It does not take your objectives, financial situation or needs into account and is not financial, tax, credit or legal advice.