If you own a holiday house or apartment that you rent out through Airbnb, Stayz, or alocal agent, but also use yourself, or block out for family and friends, the ATO has just released a significant change of approach that could mean losing your deductions entirely, even for the periods the property genuinely earned you rent.

This isn’t a tweak to the existing rules. It’s a new interpretation that catches many holiday-home owners who assumed that, because they were genuinely earning some rental income, they were entitled to apportioned deductions in the usual way. For a meaningful number of holiday home owners, that assumption is no longer correct.

The rule behind this: “leisure facilities” and section 26-50

Buried in the tax law is a provision that denies deductions for costsrelating to the ownership, use, maintenance, or repair of a “leisure facility.” A leisure facility is broadly defined as land, a building, or part of a building that is used (or held for use) for holidays or recreation.

In November 2025, the ATO confirmed that a holiday home falls squarely within this definition, and setting out, for the first time, exactly how the ATO will apply this provision to holiday homes that are also rented out.

Where section2  6-50 applies, deductions are denied entirely, not apportioned down, but denied, for expenses relating to ownership and use of the property. This includes:

• Interest on borrowings used to acquire the property;
• Council rates;
• Land tax
• Building insurance; and
• Maintenance and repair costs (and very likely utilities, such as electricity and gas, though the ruling doesn't explicitly list these).

Crucially, this denial can apply even during periods the property is actually rented out and earning you income; you still have to declare that rental income as assessable, but you may not be able to claim a matching deduction against it.

The escape hatch: “mainly” used to derive rent

There is one critical exception. If, at all times during the income year, your propertyis used (or held for use) mainly to produce rental income, section 26-50 doesn’t apply at all, and your deductions are worked out under the normal rules instead (subject to the usual apportionment for any private use).

The entire question, then, is: is your property mainly a holiday home for you, or mainly a rental property that happens to also let you stay there occasionally?

This is a “no single factor decides it” test, but the ATO has indicated a few things weigh heavily:

• How the property is actually used over the year, including patterns of use by you, your family, and friends, even at no rent or a discount.
• Whether you block out peak periods (school holidays, Christmas/New Year, Easter, major local events) for your own use. This is the single biggest red flag in the ATO’s guidance.
• Simply advertising the property for rent when you’re not using it isn’t enough on its own; the ATO looks at substance, not just listing activity.

Where the line actually falls; real ATO examples

The ATO’s own examples make the distinction concrete:

Genuinely a rental property (deductions allowed):

Cho rents her Gold Coast apartment to holidaymakers, actively manages bookings, never reserves it for herself, and treats it purely as an investment. Not a holiday home; full deductions available.

Minor private use, still mainly rental (deductions allowed):

Eve rents her seaside apartment through a platform, earning most of her income during peak summer. She never blocks out time for herself but occasionally stays there for a night or two during quiet periods. Even though this technically makes it her holiday home, she’s still mainly using it to derive rent; deductions remain available.

Holiday home with limited rental (deductions denied):

Carla owns a Whitsundays beach house, always blocked out for her family at Easter, Christmas/New Year,and school holidays, and it’s only actually rented around five days a year. Deductions denied under section 26-50, even on the rental income she does earn.

Prioritising lifestyle over income (deductions denied):

Daniel and Kate block out their beach house for two to three weeks a year, often coinciding with peak rental demand. Because their personal use eats directly into the periods when the property could otherwise earn the most rent, it’s not mainly used to derive rent, deductions denied.

The common thread: it’s not really about the number of days rented versus used privately. It’s about whether your personal use is crowding out the property’s income-earning potential, especially during the periods it would otherwise be most valuable as a rental.

The ATO’s “traffic light” compliance guide

Recognising how genuinely uncertain this assessment can be, the ATO has also released guidance which sorts typical arrangements into three risk zones:

Green zone(low risk)

High occupancy, especially during peak periods; minimal personal use; clear priority on maximising rental income; the property is rented on genuine commercialterms.

Example: Eric’s Gold Coast apartment sits in a managed rental pool with consistently high occupancy. He blocks out four weeks a year for his own holiday during low-demand periods, and otherwise only stays there opportunistically if it’s unbooked.

Result: deductions stay available.

Amber zone(medium risk)

Increased personal use, particularly during periods when the property would otherwise earn good rent; the owner forgoes rental income to keep the property available for themselves; limited effort to actively maximise bookings.

Example: Leonie uses her Hobart apartment as a personal retreat for a few months each year during peak season and doesn’t respond to rental enquiries during that window. The ATO suggests she could shift toward the green zone by actively managing the property year-round to prioritise rental income.

Red zone(high risk)

Extensive blocking-out during peak periods; unreasonable conditions placed on renters (excessive minimum stays, restrictive house rules, rejecting bookings without good reason) that suppress occupancy; little genuine attempt to maximise rentaluse.

Example: Josh instructs his agent not to rent his Busselton beach house during summer school holidays or Easter so it's available for his family, even if they don’t always use it, and is highly selective about other bookings.

Result: deductions denied.

If your current arrangement looks more amber or red than green, it’s worth understanding exactly why, and whether anything about how you manage the property could genuinely shift that picture.

When does this start applying?

This is a change of approach, not a change in the law itself, so technically, the ATO’s view applies to income years both before and after the final ruling is issued. However, the ATO has introduced a transitional concession: it won’t dedicate compliance resources to reviewing section 26-50 for holiday home expenses incurred before 1 July 2026, provided the arrangement was entered into before12 November 2025.

In otherwords, new or recently changed arrangements don’t get the benefit of the transitional concession, and from 1 July 2026 onward, everyone is squarely inscope.

What you can still claim regardless

Even where section 26-50 denies your ownership and holding-cost deductions, expenses thatrelate purely to your rental activity, rather than to owning or using theproperty, generally remain deductible in full:

• Host service fees (e.g., Airbnb’s commission);
• Advertising costs for tenants; and
• Real estate agent fees specifically tied to rental management;
• Cleaning costs between guest stays.

You also still need to declare any rental income as assessable, regardless of whether your deductions are denied, this isn’t a “don’t report it” situation, it’s a “youmay not get to offset it” situation.

If you own a rental that you sometimes use and want help navigating these changes, reach out to our office today

If you own a property that you rent out but also use personally, even occasionally, it’s worth honestly assessing where your arrangement sits against the green/amber/red framework, particularly around how you treat peak periods. A relatively small change in how you manage bookings (genuinely opening up peak periods to renters, responding promptly to enquiries, reducing how often you block out high-demand dates) could be the difference between keeping and losing your deductions.

Given the transitional concession only protects arrangements already in place before 12 November 2025, and only until 1 July 2026, this is worth addressing well before your next tax return, not after.

Get in touch with our office if you'd like us to review your specific arrangement against the ATO’s new approach.

This article is general in nature and does not constitute tax advice. It is based on draft ATO guidance (TR 2025/D1 and PCG 2025/D7) current as at mid-2026, which had not been finalised at the time of writing. Speak with us about how these rules apply to your specific circumstances.