It is a uniquely Australian dream, and perhaps even more specifically, a Victorian one: owning a primary home in the inner city, while maintaining a coastal retreat down the Great Ocean Road, the Mornington Peninsula, or the Bass Coast.
Recently, a client presented a fascinating scenario: “We own a block of land in a coastal town, plus our home in the inner city. We have no debt. We want to build a home on the land in the coastal town. We currently have substantial savings to cover a large portion of the build and will work for several more years. Should we build on the land and live between the coast and the city, or sell the land and rent a holiday house each year?”
Bouncing between a coastal property and an inner-city home is a primary goal for many, so it is easy to approach this with some lifestyle bias. However, from a legal, tax, and financial perspective, it is a decision that requires careful balancing.
The Purely Financial Lens: The Case for Renting
On a purely financial basis, you are probably better off selling the vacant land, investing the capital, and simply renting a holiday house when you need it.
Renting as needed rather than owning means zero maintenance costs, no surprise repair headaches, and no council rates. More importantly for Victorians, it means avoiding Land Tax. In Victoria, the State Revenue Office (SRO) imposes land tax on secondary properties. Recent state budgets have introduced lowered tax-free thresholds and temporary surcharges, making the holding costs of a second home or vacant land significantly higher than in the past. Furthermore, you will need to navigate Victoria’s Vacant Residential Land Tax (VRLT), which penalises homes left unoccupied for more than six months of the year, unless you qualify for specific exemptions (detailed below).
Finally, relying on the capital growth of a coastal property is inherently uncertain. While coastal markets boomed a few years ago, they can be volatile.
The Lifestyle Dividend: The Case for Building
But life is not lived on a spreadsheet. From a life satisfaction point of view, there is significant upside to owning your coastal retreat. Owning your second home, instead of renting, can give you immense peace of mind.
When you build and own, you put down roots. You get to know your neighbours and become a genuine part of the local community. You can visit whenever you like, even just for a spontaneous single night, without the stress of booking minimum stays or dealing with peak-season availability. You can plant a veggie garden, renovate the kitchen to your exact taste, and leave your surfboards and winter coats in the cupboard.
You also gain the flexibility to invite family and friends down, or let them use it when you don’t need it, creating a multi-generational family asset.
Legal and Tax Considerations for the Long Game
If you do choose to build, you must factor in the legal reality of Capital Gains Tax (CGT). In Australia, your primary residence is generally exempt from CGT. However, your coastal holiday home will not be. When the time eventually comes to sell the coastal property, you will be liable for CGT on the profit made from its increase in value.
Navigating the Vacant Residential Land Tax (VRLT) A major concern for Victorian holiday homeowners is the VRLT. Yes—a genuine holiday house can be exempt from this tax, but it is not automatic.
The SRO guidance states that a holiday home is exempt if you or your close relatives use it for at least 4 weeks in the calendar year. These 4 weeks do not need to be continuous, and use by different eligible relatives can be added together. The owner must also have a principal place of residence (PPR) in Australia. The SRO mandates that it must be a genuine holiday home, considering matters like the location of the property, how and when it is used, and the distance from the owner’s actual home.
A few practical points follow from that strict criteria:
- You can only claim one holiday home exemption per year.
- Joint owners can claim it, but all joint owners must have a PPR in Australia.
- For companies and trusts, the rules are much stricter and depend on ownership continuity and eligible natural persons using the property.
Ultimately, a “holiday house investment” is only exempt if it genuinely fits the holiday home criteria. If it is really just an idle investment property or is only used intermittently without satisfying the statutory requirements, it may still be exposed to VRLT. The most useful practical advice is to keep a usage diary and retain supporting records (like local toll or grocery receipts), as the SRO specifically notes this is a good way to support your claim.
Funding the Build and Looking Ahead Because you have substantial savings but a remaining shortfall for the build cost, you will likely need a short-term mortgage to bridge the gap. Working for a few more years makes this highly manageable, especially with no debt on your principal home.
Later in life, the long drive down the highway might become unpalatable. But at that point, you are in a position of immense legal and financial strength. You can choose between two home options, ultimately selling the surplus home to comfortably fund your final phase of retirement or your aged care transition.
The Verdict
Ultimately, building on your coastal block is a lifestyle choice heavily subsidized by your excellent financial position. If you can comfortably service the short-term debt and absorb the Victorian land tax obligations—and ensure you use the property enough to satisfy the VRLT exemption—the emotional return on investment of a permanent coastal retreat often far outweighs the purely financial benefits of renting.
Disclaimer: This article is for general informational purposes only and does not constitute formal legal or financial advice. Please consult with a qualified professional regarding your specific circumstances.