Holiday home owners are facing the most significant structural tax changes in decades, and they are arriving on two fronts at once.
- On 20 May 2026, the Australian Taxation Office released binding guidance, including Taxation Ruling TR 2026/1, PCG 2026/2, and PCG 2026/3, that tightens the rules on when rental deductions can be claimed for properties also used privately. That package replaces the long-standing Taxation Ruling IT 2167, withdrawn from 12 November 2025.
- Then, in the 2026–27 Federal Budget handed down on 12 May 2026, the government announced sweeping changes to negative gearing and capital gains tax that will reshape the economics of owning a holiday rental for years to come. Full details are set out in our 2026–27 Budget summary.
If you own and rent a beach house, ski chalet, or any property you use personally, as well as those listed on Airbnb, Stayz, or a similar platform, both sets of changes apply to you.
What The New Guidance Covers
TR 2026/1 applies to individual taxpayers who earn income from a rental property but are not carrying on a rental business. It covers both short-term rentals and traditional long-term leases, and includes rooms listed on online booking or sharing platforms such as AirBnb and Stayz.
The ruling explains when money you receive for the use of your property is assessable income, when losses and outgoings are deductible, and how to apportion deductions when your property has both income-producing and private uses.
Two companion guidelines support it. PCG 2026/2 sets out apportionment methods the ATO considers fair and reasonable. PCG 2026/3 sets out the ATO’s compliance approach, including the risk zones it uses to decide how closely to scrutinise your claims.
You can read more about rental property tax deductions in our broader guide on the topic.
Is Your Property A Holiday Home?
A “holiday home” under the ruling is a type of “leisure facility”, which is defined in section 26-50 of the Income Tax Assessment Act 1997 as land, a building, or part of a building that is used, or held for use, for holidays or recreation.
“Holiday” takes its ordinary meaning: a period of cessation from work, or a vacation. “Recreation” includes amusement, sport, or similar leisure-time pursuits.
Whether your property qualifies as a holiday home depends on how you actually use it, and how you hold it when it is unoccupied. A property does not cease to be a holiday home just because no one is staying there, if you are keeping it available for your own personal use.
The ATO looks at the pattern of use over time. If you and your family are the ones deciding when the property is available for guests, rather than a commercial manager operating it as a pure investment, it is almost certainly your holiday home.
Deductions You Can’t Claim, And Those You Can
If your property is a holiday home and does not meet the exception described below, section 26-50 denies deductions for ownership expenses. Those denied deductions include mortgage interest, council rates, land tax, water rates, body corporate fees, repairs and maintenance, capital works, and the decline in value of depreciating assets.
You can still claim expenses that are not related to ownership or use of the property itself. Advertising costs to find tenants, cleaning costs after a guest stay, and commissions or fees paid to booking platforms are deductible in full, with no apportionment required.
The distinction is this: if the expense exists regardless of whether anyone ever stayed at the property, it is likely an ownership expense and is denied.
If the expense only arises because guests actually used the property, it is deductible.
The “Mainly For Income” Exception
You are not denied ownership deductions if, at all times during the income year, you use your holiday home, or hold it for use, mainly to produce assessable income from rent, lease premiums, or licence fees.
“Mainly” means chiefly or principally. The ATO confirmed in TR 2026/1 that this is not a simple numbers test. Simply renting the property for more than half the year is not enough on its own.
The test is both quantitative and qualitative. Relevant factors include:
- how the property is actually used;
- how much time it is dedicated to income-producing use;
- how much time it is held for potential private use;
- and critically, whether it is available and used as a rental during the times when it is most desirable as a holiday destination, such as school holidays, public holidays, and peak seasonal demand periods.
Peak demand varies by location. A property in a coastal area will typically peak in summer. A ski lodge peaks in winter. A city apartment near a major stadium may peak around sporting events and festivals.
You should have an objective explanation for why personal use at those peak times does not undermine an income-producing focus for the rest of the year.
Minor or incidental private use will not disqualify you from the exception. For example, staying a few nights in the off-season when there are no bookings and little chance of a booking. You will still need to apportion deductions for those private days.
The ATO’s Three Risk Zones For Compliance Action
PCG 2026/3 explains a traffic-light system to describe how closely the ATO will scrutinise your holiday home deductions.
Green zone (low risk). Your arrangement shows high income-producing occupancy, particularly during peak periods, limited personal use, commercial rental terms, and a clear prioritisation of rental income over personal convenience. The ATO will not apply compliance resources to consider section 26-50 for your arrangement, other than to confirm the green zone features are genuinely present.
Amber zone (medium risk). Your arrangement shows increased personal use, including making the property available for personal use during peak times, combined with limited attempts to maximise rental income. The ATO may investigate to determine whether section 26-50 applies to deny your deductions.
Red zone (high risk). Your arrangement shows the property is blocked out for personal use during the best rental periods, major features are kept inaccessible to guests, unreasonable restrictions are placed on tenants, and there are minimal genuine attempts to rent. The ATO will treat this as a priority for compliance action and may proceed to audit.
No single factor places you in any particular zone. The ATO looks at the whole picture over the ownership period.
How To Apportion Your Deductions
If the exception applies, that is, your property is used mainly to produce income, you can claim ownership deductions, but you must still apportion them to exclude periods of private use. PCG 2026/2 sets out the apportionment methods the ATO will accept.
The time-based method divides the income-producing days by the total days you owned the property in the year. Income-producing days includes days the property was actually occupied for rent (including days paid for but not physically occupied) plus days the property was genuinely available for rent on commercial terms. This meaning being broadly advertised, at competitive rates, and with enquiries actively monitored.
Where only part of your property is rented out, the area-based method applies. You calculate the tenant’s exclusive floor area plus half the shared common areas, divided by the total floor area of the property.
If only part of your property was rented for only part of the year, you combine both methods.
Some expenses never need apportionment. Agent fees, platform commissions, advertising, and cleaning costs after a guest stay are 100 per cent deductible if they relate solely to the rental activity. For the full range of rental property deductions, refer to our dedicated guide.
If you rent to family or friends below market rates, deductions are capped at the amount of rental income received from the property.
Transitional Period To 1 July 2026
The ATO acknowledges that section 26-50 has not previously been publicly applied to rental properties in the way set out in TR 2026/1, and that property owners may have structured arrangements without realising the provision could apply.
As a result, the ATO will not devote compliance resources to reviewing whether section 26-50 applies to expenses incurred in relation to a holiday home that is also a rental property, if those expenses were incurred before 1 July 2026.
This transitional protection does not apply if there is evidence of avoidance, fraud, or evasion, or if you have taken inappropriate advantage of the approach. From 1 July 2026, the new rules apply in full, and the ATO has indicated it will engage with arrangements that fall in the amber and red zones.
Negative Gearing: New Restrictions From 1 July 2027
The 2026–27 Budget announced that negative gearing will be restricted for residential properties purchased after 7:30 pm AEST on 12 May 2026.
Negative gearing means using net rental losses to reduce your salary or other unrelated taxable income.
From 1 July 2027, if your holding costs (such as mortgage interest) exceed the rental income from a newly acquired holiday home, you cannot offset that loss against your wages or other non-rental income.
Instead, the loss is quarantined. It can only be applied against future rental income or capital gains from residential properties, and any unused losses carry forward indefinitely.
Two important exceptions apply:
- If you owned your holiday home before 7:30 pm AEST on 12 May 2026 (budget night), the existing rules continue to apply for as long as you hold the property. You can continue to negative gear against your general income until you sell.
- If you build a new holiday home, you also retain the ability to negatively gear, even for purchases made after the budget cut-off. The intent is to preserve incentives for adding new housing supply.This could be constructing on vacant land or redeveloping an existing property, for example.
Capital Gains Tax: Major Changes From 1 July 2027
The Budget also announced the end of the 50 per cent capital gains tax discount for individuals, trusts, and partnerships on residential property sales after 1 July 2027.
In its place, the government is introducing cost base indexation, meaning the property’s purchase price is adjusted for inflation and you pay tax only on the real gain above that inflated base.
A minimum tax rate of 30 per cent will apply to these inflation-adjusted capital gains.
Transitional rules protect gains that accrued before the switch. If you sell a property you have held for some years, the 50 per cent discount still applies to the portion of the gain earned up to 1 July 2027. Only the gain accruing after that date is subject to the new indexation method and minimum rate of 30 per cent.
Owners of “pre-1985 assets” (properties purchased before September 1985 that were previously exempt from capital gains tax entirely) face a new liability.
Gains accruing on those assets after 1 July 2027 will now be subject to CGT on sale. If you hold a legacy holiday home in this category, the clock started running on 12 May 2026.
Separately, TR 2026/1 notes that renting out some or all of your main residence, even briefly, can affect your access to the main residence CGT exemption when you eventually sell. The CGT consequences flow from the income-producing use of the property itself, not from whether you claimed deductions.
Ownership expenses denied as deductions under section 26-50 do not simply disappear. They may form part of the third element of the cost base of the property, potentially reducing the taxable gain when you sell. Keep records of all expenses, deductible or not.
Holiday Homes Held In Discretionary Trusts
Many holiday homes are held in family discretionary trusts for succession planning or asset protection. The Budget announced further changes targeting this structure from 1 July 2028.
From that date, trustees will be required to pay a flat minimum tax of 30 per cent on the net taxable income of the trust, and that would include any rental profits from a holiday home held in the trust. Non-corporate beneficiaries will receive a non-refundable tax credit for the 30 per cent tax paid by the trustee.
To allow families to restructure ahead of these changes, a three-year rollover relief window opens on 1 July 2027. Assets, including holiday homes, can be moved out of a discretionary trust and into a company or fixed trust during that window without triggering immediate capital gains tax or other federal tax penalties.
If your holiday home sits inside a family trust, review the structure with a tax adviser well before 1 July 2027 to understand whether the rollover suits your circumstances.
For a full overview of how the 2026–27 Budget affects property investors, see our budget summary.
This article summarises the ATO’s guidance in TR 2026/1, PCG 2026/2, and PCG 2026/3 issued on 20 May 2026, and the property-related measures announced in the 2026–27 Federal Budget on 12 May 2026. The Budget measures are subject to legislation being passed. This is general information only and is not tax or legal advice. Seek professional advice before making any decisions.
This page was last modified 2026-05-25