Rental property income and deductions for individuals

​​The ATO has issued a draft Taxation Ruling TR 2025/D1  that provides guidance for individuals who earn income  from their rental property, including short-term rentals or letting out a room of their home etc. 

The draft ruling looks at: 

• When amounts received by an individual for the use of their rental property will be assessable income
• When losses or outgoings incurred by an individual relating to their rental property can be claimed as deductions
• How to apportion deductions when there are both income-producing and non-incomeproducing uses of an individual’s rental property, and
• When certain deductions for an individual’s holiday home that the individual also uses as a rental property, will be denied because it is a “leisure facility” under s 26-50 ITAA 1997. 

While in many respects the draft ruling modernises and  refreshes existing guidance, the ATO’s focus on the  leisure facility rules in section 26-50 will come as a  shock to many clients who hold holiday homes and use them to derive some income during the year. 

If a client holds a holiday home and it isn’t used / held mainly to derive assessable income during the year 
then the rules in section 26-50 can prevent the following expenses from being deductible, even if the 
property is used sometimes to produce assessable income:

• Interest on money borrowed to acquire the property
• Council rates
• Land tax
• Repairs and maintenance.

​The ATO acknowledges that its views on section 26-50 haven’t previously been publicly expressed in relation to rental properties. Also, taxpayers might have entered into arrangements that are caught by section 26-50 without realising this. As a result, the ATO indicates that won’t devote compliance resources to review whether section 26-50 could apply to expenses incurred before 1 July 2026 on holiday homes that are rental properties, if the expenses were incurred under an arrangement entered into before 12 November 2025.

The draft ruling replaces IT 2167 Income Tax: Rental properties – non-economic rental, holiday home, share 
of residence, etc. cases, family trust cases, which was withdrawn on 12 November 2025.