Rental property income and deductions

The ATO has finalised its updated guidance for individuals on income and deductions relating to rental 
properties, including its controversial new approach to holiday homes that are used to derive rent. This 
comprises three separate, but related documents, as follows: 

• ​TR 2026/1 Income tax: rental property income and deductions for individuals who are not in business
• PCG 2026/2 Apportionment of rental property deductions – ATO compliance approach
• PCG 2026/3 Application of section 26-50 of the Income Tax Assessment Act 1997 to holiday homes that you also rent out – ATO compliance approach.

​TR 2026/1 
The ruling provides guidance for individuals who earn income from their rental property, and applies to both short-term rental arrangements, such as holiday accommodation or room sharing through online platforms, and long-term residential leasing.

The ruling explains when rental receipts will be assessable income, when expenses relating to rental 
properties can be claimed as deductions, and how deductions should be apportioned where a property is 
used partly for income-producing and private purposes. It also outlines the ATO’s view on the 
operation of the “leisure facility” rules in section 26-50 ITAA 1997, under which certain holding costs for 
holiday homes may be denied completely unless an exception applies. The key thing to note is that if a 
property is classified as a leisure facility then certain expenses won’t be deductible at all, even if the 
property is used to derive some assessable rental income during the income year. 

A transitional compliance approach applies to expenses incurred before 1 July 2026, with the Commissioner indicating compliance resources will generally not be devoted to reviewing the application of section 26-50 to holiday homes during this period, except in cases involving avoidance, fraud, evasion, or inappropriate use of the concession. 

PCG 2026/2 
PCG 2026/2 outlines the ATO’s compliance approach to apportioning rental property deductions where an 
individual uses a property partly to derive assessable income and partly for private purposes, such as renting out part of a home while living in the remainder. In these situations, expenses must be apportioned on a “fair and reasonable” basis to determine the deductible amount.

The guideline sets out apportionment methods the Commissioner will accept in common scenarios. While 
taxpayers can potentially adopt a different methodology, they will need to demonstrate why it is 
fair and reasonable in their circumstances and will not have the protection of the guideline.

PCG 2026/2 applies to individuals only and does not cover rental properties used in carrying on a business 
or held by non-individual entities. It also generally excludes holiday homes, although an exception may 
apply where the property is mainly held to produce rental income. In those cases, the guideline can assist 
in apportioning deductions for any private use.

PCG 2026/3
PCG 2026/3 sets out how the ATO differentiates and manages risk for a range of rental property 
arrangements which could potentially be subject to the leisure facility rules in section 26-50.