The Tax Office is paying special attention to holiday home rentals this year

That's the advice of H&R Block director of tax communications Mark Chapman, who says any income you earn from renting your holiday home is assessable to tax and needs to be declared on your tax return.

However the good news is that because the income is taxable, you can also claim a tax deduction for any costs incurred in relation to earning that income.

According to Mr Chapman, the ATO looks closely at tax claims which relate to holiday homes to ensure that people aren't over-claiming their tax deductions. The boom in holiday home ownership throws up particular challenges for the taxman, both in making sure that they know exactly who owns what and also in making sure that taxpayers aren't rorting the system, he said.

As part of that process, the ATO has made it very clear that holiday rentals are high on its list of targets for compliance action where taxpayers do the wrong thing.

So what do you need to know to get it right?

If you rent out your holiday home during the period you're not using it, you need to declare the rental returns as income

You can only claim deductions for the periods the property is rented out or is genuinely available for rent. Periods of personal use can't be claimed. The ATO regularly finds evidence of home-owners claiming deductions on the grounds that the property is being rented out, when in reality the only people using it are the owners, their family and friends, often rent-free.

Factors the ATO looks for to indicate a property is not genuinely available for rent include:

IT IS advertised in ways that limit its exposure to potential tenants. For example, the property is only advertised through a card in the newsagent window or is only rented out during periods when the likelihood of anyone renting it is very low;

THE location, condition of the property, or accessibility to the property, mean it is unlikely tenants will seek to rent it;

YOU place unreasonable or stringent conditions on renting the property that restrict the likelihood of it being rented, such as looking to charge a rent substantially higher than others are charging for similar properties in the same area, or preventing families with children from renting, or even demanding references from prospective holiday renters;

YOU refuse to rent the property to interested people without adequate reasons.

Where the property is let at less than market rent - to friends or relatives for example, who might pay you a token amount - income tax deductions for that period will be restricted to the amount of rent received.

The costs to repair damage and defects existing at the time of purchase or the costs of renovation can't be claimed immediately. These costs are deductible over a number of years. .

Where only part of the holiday home is let, deductions are restricted to expenses which relate either directly to the rented area or to a proportion of expenses which relate to shared areas available to both you and your guests (such as a communal lounge or kitchen).

The ATO is concerned that husbands and wives are in some cases splitting income and deductions so the bulk of the tax benefit goes to the higher earning spouse, even though the property is actually owned 50:50.

If you jointly acquire a property with your spouse, everything - income and deductions - needs to be split equally.

Costs you can't deduct include:

ACQUIRING and disposing of the property, including conveyancing costs, advertising costs and stamp duty; 

EXPENSES you don't actually incur as the property owner, for example costs in relation to the property which the person renting the property pays;

EXPENSES not related to the rental such as interest on a loan which might originally have related to the property but where additional funds have been drawn down to fund private activities;

TRAVEL expenses associated with renting the property. Prior to July 1, 2017, you could claim a deduction for the costs of any travel undertaken to visit the property provided the visit was related to the property management of the property. This is no longer possible.

There are other expenses which, while not immediately deductible, can be claimed over a number of years, including borrowing expenses (ie costs linked to financing the property such as title search fees, loan establishment fees, stamp duty), depreciation costs on assets used in the building (such as air conditioners, hot water systems) and capital works deductions (such as costs spent on altering, improving or extending the structure of the building).

Remember, you can only claim the proportion of costs which relate to periods the property was available for rent.

Importantly, the ATO now has access to many sources of third party data, including access to popular rental listing sites for long term and holiday rentals, so it is relatively easy to establish whether a claim that a property was "available for rent" is correct.

The advice to taxpayers is to be careful. Don't claim what you're not entitled to and make sure you have records to support and justify every item.