A common topic we speak to clients about is about the merits of purchasing your own holiday house. The start of these conversations are usually based on a recent holiday the clients have been on, where they absolutely love the coastal town they’ve just stayed in but have paid a fortune for holiday accommodation.
It would be much cheaper to just buy the place! Wouldn’t it?
All of the costs involved are completely tax deductible! Aren’t they?
Well……. it depends!
We have seen some clients pour a lot of money into these investments, effectively making them a slave to the large debt they have incurred in buying the property. However, we have also seen other clients make very good investment decisions with holiday house purchases.
Things that need to be taken into account when considering the purchase of a holiday home:
- Why are you buying this property? Is it purely as a financial investment? If yes, is this the best place you can invest your money? If no (and this is more a lifestyle purchase), then this “blurs the lines” completely as you are purchasing the property for non-financial reasons. You then must take into account you will be tying up a lot of your capital in an investment which may provide little (or nothing!) of a financial return;
- What is the likely holiday rental all year round, not just in peak season? In most cases our clients will holiday in popular coastal locations in peak periods when the rents are sometimes thousands of dollars per week. However, in the winter months these properties may be extremely difficult to rent out and may remain vacant for large periods of time. This places enormous pressure on cash flow, especially if having to service loan commitments;
- The costs in keeping a holiday rental property are significantly higher than a residential rental property. Usually, agents fees are in the order of 20% of gross rental income and due to the high turnover of tenants, maintenance and cleaning fees are regular and significant. You generally also have to fully furnish the home, which may also include linen which has to be regularly cleaned and replaced. You really need to do your homework in this area and if possible find ways to reduce these costs without affecting the quality of what you are offering to customers;
- There are tax traps – if you are using the property for your own holidays then the costs you incur during the year must be apportioned to exclude the “private use” portion of your expenses. If you are spending significantly on the property, especially after you have just purchased the property, then much of the expenditure may only be depreciable over a number of years, rather than immediately deductible. Even if it is immediately deductible, you only get a portion of your expenditure back on an after tax basis. You need to get expert advice from your accountant to be sure.
- Are you paying the right price for the property? If you buy it and end up selling it in the short term, is it likely will you be able to get at least your purchase price back?
I have some clients who have ceased renting out their holiday house purely to eliminate the stress of continual management, expense and upkeep. They have been happy to forego the income (which in most cases is not that lucrative after all expenses are paid) and can now stay in the property at any time they choose.
In all cases, whether rented out or not, make sure you have capacity to meet loan repayments, or better still have no debt on the property at all!
Owning a holiday house might be one of the more enjoyable things you and your family ever do. Just make sure you do your homework as well as ensuring you know what you are getting yourself in for.