Interest deductions during long period of repairs

I have a property in QLD that got flooded due to a leakage in December. Tenants broke the lease and vacated. I live in NSW and have been pushing property manager since then to get property back to market, but due to several reasons listed below, it took little over 5 months to get property back to market.

1. Christmas shutdown
2. Agent leaving the job
3. Covid lockdowns
4. Insurance asking us to get quotes approved first before proceeding with repairs
5. Tradies keep rescheduling appointments with all the major renovations happening
etc.

I heard somewhere that if you pull property from market for long period of repairs, then expenses are not deductible. In my case, I have the intention of putting the property back on market ASAP to get the cashflow coming in (have lots of emails chasing agent, insurance company etc.), but due to above reasons, it took months. So are the expenses deductible during this period? Thanks in advance for any advice.

 

The interest should still be deductible if you are taking actions to try and get the property back to the stage where it can be rented out. Steele's case.

New laws introduced in 2019 only prevent interest being claimed during construction on vacant land.

 

Thanks Terry_w for the quick response. Feel better now.

 

Wih no changes of intentions should be fine provided you arent changing the land use in whole or part. If so, seek property tax advice as the "vacant land" rules terry mentioned are seemingly simple but can become complex as a avoidance rule aplies which looks at portions of land.. I have seen several clients this year with combined effects of bad tenants, defects and covid then storm damage all combined nicely to make it a worse year.

Holding costs during the period should all be deductible eg rates, land tax, interest. I dont usually mention repairs as this usually still needs some guidance since many repairs are NOT repairs that are deductible. And blending the costs of repairs and other work can cloud the deduction too. The costs may be replacement assets, improvements and basic depreciable items or a element of the building. It can be well worth seeking property tax advice as some signiifcant building costs may be deductible repairs in some cases. Example includes replacing a whole roof etc. And scrapping deductions for the portion of a damaged building.

 

Another along the same line.

If an investment property is purchased and it takes say 3 months to repair before you get tenants in the property because its not in a rentable state.
Would the interest on the loan from settlement to the date tenants occupy the property be tax deductible?

 

It could be. Similar to the op

 

Thanks Terry

 

Steele's decision is the relevant case law that the ATO accepts. Steele's decision was primarily a case about whether interest deductions during construction when a taxpayer has intention to produce rent in a later tax period will be deductible under the general deduction priciples ie "A cost necessarily incurred in producing assessable income"...in a future tax period.

The ATO consider it applies to interest and other holding costs preliminary to a expectancy to produce rental income (ie not sell the property). Recent tax laws from 1 July 2019 now prevent "holding costs" being deducted for some vacant land as applied in Steele's case (ie construction). However for renovations and repairs and enhancements are outside the scope of these new "vacant land" tax laws.

 

Thanks Paul

 

I have a variation on this. Just bought a property and is rented so interest deductible. However the property is quite old so plan to potentially do substantial rennovation / knockdown rebuild at some point say 2-3 years time once plans etc organised.

If i do that, would loan be deductible during that rennovation phase? After construction, i would then lease out again.

Also, broker is telling me to put down applicaiton as owner occuper, not investment, would this make a difference for tax? What about if say 12 months post rennovation i then moved in?

Many thanks

 

no

no.
If you moved in then interest wouldn't be deductible.

 

thanks - very helpful. also googled for ato explanation in case others interested.

Deductions for vacant land

 

Indicating a property is being occupied when it isnt doesnt also attrachk a change in tax issues. The property wont meet the CGT main residence or state land tax requirements. It is a mere disguise for a lender. A bit dishonest on the part of the broker and the applicant.

The vacant land rules may impact a sunstantial reno or rebuild. In whole or part.

I would be seeking tax advice on attempting to blend a main residence concession as it may be futile