ATO's New Holiday Home Tax Rules Explained: What TR 2026/1 Means for Property Owners

We have been getting a lot of questions from clients lately about their holiday homes — particularly whether they can still claim the usual tax deductions when they also rent the property out on Airbnb or similar platforms. The short answer is: the rules have changed, and the change is significant.

On 20 May 2026, the ATO issued Taxation Ruling TR 2026/1 — Income tax: rental property income and deductions for individuals who are not in business. This ruling replaces IT 2167, which had been in place since 1985. The new ruling is more restrictive than many property owners expect, and it applies from 1 July 2026.

At Elite Accounting Solutions, we have reviewed the ruling in full — alongside the accompanying guidance documents PCG 2026/2 and PCG 2026/3 — and the analysis below draws on the ATO's own ruling, as well as technical commentary from BDO Australia and Pitcher Partners. Here is what you need to know.

1. Why the Old Rules Are Gone

For decades, Taxation Ruling IT 2167 (1985) governed how holiday homes that were also rented out were treated for tax purposes. Under that ruling, it was relatively common for holiday home owners to claim deductions proportional to the time the property was available for rental, even if it was also used personally.

TR 2026/1 changes this by formally applying section 26-50 of the ITAA 1997 — the "leisure facility" rules — to holiday homes. These rules were already in the law, but had not been publicly applied to individual rental properties. The ATO has now confirmed it will use them.

The stated purpose of section 26-50 is to prevent taxpayers from obtaining a tax subsidy for their own recreational expenditure. As the ATO puts it, the rules establish a firm rule against allowing deductions where the expenditure is, in substance, for the taxpayer's own recreation.

2. What Is a "Leisure Facility"?

Under section 26-50(2), a leisure facility is defined as land, a building, or part of a building or other structure, that is used (or held for use) for holidays or recreation.

Your holiday home can be a leisure facility even when:

• It is also listed on Airbnb, Stayz or similar platforms
• You only stay there for a few weeks per year
• You genuinely intend to rent it out most of the time
• The property is unoccupied for much of the year

The key question is not how often you actually use the property — it is whether you use it or hold it for use for holidays or recreation. Holding periods and availability (including periods when the property is unoccupied but being "held" for personal use) count toward the assessment.

Crucially, the ATO also considers use by family and friends at no charge or at a reduced rate as private use. If your adult children use the beach house over summer for free, that counts.

3. When Are Deductions Denied?

Section 26-50(1) denies deductions for losses or outgoings related to the ownership or use of a leisure facility. This includes:

• Mortgage interest and loan costs
• Council rates
• Land tax
• Insurance premiums
• Repairs and maintenance
• Building depreciation (Division 43)
• Asset depreciation (Division 40)
• Any other cost incurred to acquire, retain, operate, maintain or repair the property

These deductions are denied in full — there is no ability to apportion them for the time the property was rented out. This is a critical departure from how many owners have been managing their tax affairs to date.

4. The Exception: "Mainly Used for Rental Income"

There is an exception to the denial rule. Under subparagraph 26-50(3)(b)(ii), if at all times during the income year you use your holiday home (or hold it for use) mainly to produce assessable income in the nature of rents, lease premiums, licence fees or similar charges, the deduction denial does not apply.

"Mainly" is interpreted to mean chiefly, principally, for the most part — and it is assessed objectively, not based on what you intend or say.

The ATO has made clear that simply advertising the property while it is not actively being used is not sufficient on its own to meet this test. The following factors are considered together:

• The actual pattern of how the property is used across the year
• The proportion of time dedicated to income-producing use
• The proportion of time used for private purposes or held for potential private use
• Whether the property is available for rental during peak demand periods — school holidays, public holidays, Christmas/New Year, Easter, peak seasonal periods specific to the property's location
• Whether rental is offered at genuine market-based pricing

5. The ATO's Risk Framework: Green, Amber, Red

Practical Compliance Guideline PCG 2026/3 introduces a risk-based framework to help property owners assess their position. No single factor is determinative, but the zones broadly reflect:

• Green (low risk): The property has high occupancy from paying guests, limited personal use, is genuinely available during peak periods at market rates, and no unreasonable restrictions are placed on prospective renters. The property is treated primarily as an investment.
• Amber (medium risk): There is increased personal use or the property is reserved for family and friends during some peak periods. Income generation is compromised but the property still generates meaningful rental income.
• Red (high risk): The property is primarily used for personal holidays. Rental activity is minimal or token. Personal use — or availability for personal use — during peak demand periods is prioritised. This is where the ATO will focus compliance resources.

The green zone properties are essentially those where the owner takes all reasonable steps to maximise rental income and does not reserve the property for personal use. The red zone covers the classic situation many Australians are in: a beach house or ski cabin that the family uses in summer or winter and lists on Airbnb in between.

6. Real-World Examples from the Ruling

Example A: Beachside House — Deductions Denied

Carla owns a beach house in a coastal area. It is advertised year-round through a real estate agent. However, it is always blocked out and unavailable for rent during Easter, Christmas-New Year and school holidays — even when Carla does not end up using it herself. The property is rented out on average for only a few days per year. Carla also sometimes rejects applicants or cancels bookings to use the property herself.

Result: The beach house is a holiday home. It is not mainly used to produce rental income. Carla must declare the rental income she receives but cannot deduct any ownership expenses — interest, rates, insurance, repairs, depreciation.

Example B: Gold Coast Apartment — Deductions Allowed

Cho owns an apartment on the Gold Coast and markets it exclusively to holidaymakers through a sharing platform. She takes all reasonable steps to ensure it is fully rented. She does not reserve it for personal use at any time and does not place unreasonable restrictions on bookings.

Result: The apartment is not Cho's holiday home because she does not use it for her own holidays or recreation. It is purely an investment. Ownership deductions are fully available (subject to apportionment for any unrented periods).

Example C: Minor Personal Use — Deductions Allowed with Apportionment

Eve owns a seaside property that generates most of its income during peak summer. She occasionally uses it for one or two nights in off-peak periods when there are no bookings, and only when it will not affect rental opportunities. She does not block out any periods for personal use.

Result: Eve's property is technically a holiday home (she uses it for her own holidays), but because she mainly uses it for rental income, ownership deductions are not denied. She must still apportion deductions for the nights she personally used it.

7. What You Can Still Deduct

Even where the denial rules apply, some expenses remain deductible because they do not relate to the ownership of the property — they relate specifically to the rental activity. These include:

• Advertising costs to find tenants or guests
• Booking platform service fees and commissions (e.g. Airbnb service fees)
• Cleaning costs incurred after a paying guest's stay
• Property management fees charged by an agent in relation to rental bookings

These are still claimable to the extent they are incurred in producing rental income. However, ownership costs — which are usually much larger — remain denied.

8. The Transitional Period: What It Means for This Financial Year

The ATO has acknowledged that the application of section 26-50 to holiday home rental properties has not previously been publicly expressed. Accordingly, it will not devote compliance resources to reviewing whether section 26-50 applies to expenses incurred in relation to holiday homes before 1 July 2026.

This means the 2024–25 tax return (lodged in 2025) and the expenses you incur up to 30 June 2026 are protected under the transitional approach — provided you are not engaged in avoidance, fraud or evasion, and are not inappropriately taking advantage of the approach.

From 1 July 2026, the new rules are fully operative and the ATO will treat holiday home expenses in accordance with TR 2026/1.

9. What About Apportionment?

Where a property is not classified as a leisure facility (or where the "mainly for rental" exception applies), you still need to apportion your deductions on a fair and reasonable basis between income-producing and non-income-producing use.

PCG 2026/2 provides guidance on the apportionment methods the ATO considers acceptable. Common methods include:

• Time-based apportionment: Deductions are calculated based on the proportion of days actually rented versus total available days or total days in the year
• Area-based apportionment: Used when only part of a property is rented
• Combined methods: For complex mixed-use scenarios involving both time and space variations

10. Summary: Does This Affect You?

This ruling is relevant to you if:

• You own a property that you use or intend to use for personal holidays or recreation, even occasionally
• You also rent that property out on Airbnb, Stayz, or through a real estate agent
• You or your family and friends use the property during school holidays, Christmas, Easter or other peak periods
• You block out periods of the year for potential personal use, even if you do not always use it
• You charge family or friends below-market rates to stay at the property

If any of these apply, the new rules may significantly affect what you can claim at tax time. The financial impact can be substantial — mortgage interest alone on a coastal or ski property can be tens of thousands of dollars per year.

We strongly encourage you to book a consultation with our team before 30 June 2026 so we can review your specific circumstances and help you plan for the new rules.

This article is based on Taxation Ruling TR 2026/1 (issued 20 May 2026), PCG 2026/2, PCG 2026/3, and technical analysis published by BDO Australia and Pitcher Partners. It is general in nature and does not constitute personal tax advice. Please contact us for advice specific to your situation.