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Interest on rental property during renovations

Discussion in 'Accounting & Tax' started by NeedMoreTime, 25th Oct, 2015.

  1. NeedMoreTime

    NeedMoreTime Member

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    Hi All,

    About 6 months ago I purchased a property for the sole purpose of using it for an investment property. I required quite a bit of work and I have just finished renovating it and is now ready for rent.

    I'm a bit confused about whether I can claim the interest on the loan used to purchase the property. I have found two sections in the following document that kind of suggest I can, but I can also read it differently.

    From: https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/ind39784n17290614.pdf

    Expenses prior to property being available for rent
    You can claim expenditure such as interest on loans, local council, water and sewage rates, land taxes and emergency services levy on land on which you have purchased to build a rental property or incurred during renovations to a property you intend to rent out. However, you cannot claim deductions from the time your intention changes, for example if you decide to use the property for private purposes.

    Interest on loans
    If you take out a loan to purchase a rental property, you can claim the interest charged on that loan, or a portion of the interest, as a deduction. However, the property must be rented, or available for rental, in the income year for which you claim a deduction. If you start to use the property for private purposes, you cannot claim any interest expenses you incur after you start using the property for private purposes. While the property is rented, or available for rent, you may also claim interest charged on loans taken out: n to purchase depreciating assets n for repairs n for renovations. Similarly, if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out. However, if your intention changes, for example, you decide to use the property for private purposes and you no longer use it to produce rent or other income, you cannot claim the interest after your intention changes.
    Can someone in the know please:
    • confirm that the interest on the loan for purchasing the property can be claimed or is it just the interest on the loan to do the renovation that can be claimed?
    • Where do I claim the interest since it's not an investment that has generated any income?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Xenia and legallyblonde like this.
  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Not a rental expense for the period up until availability. If its a Steele's decision deduction its claimed at D15.
     
  4. NeedMoreTime

    NeedMoreTime Member

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    Thanks Terry_W and Paul@PFI,

    You say if its a Steele's decision claim it at D15, does it sound like a Steele's decision? I did a bit of a search and it's not clear to me how it relates, it seems to be about the deductibility of interest on money borrowed to purchase land intended to be developed.
     
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I cant give personal advice here.

    Tip : That is not what Steele's decision relates to. The decision was about (interest) deductions incurred in a different tax period when there was a expectation of the property being constructed (not being developed as such) being used to produce future assessable income.
     
  6. Rob G

    Rob G Well-Known Member

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    However, no hotel was ever built and no business income ever generated.

    There was a bit of horse agistment income from the empty block.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    And I think Mrs Steele dragged it out for about 10 years.

    But she did make repeated and continuing efforts with the end goal of ending up with an income producing property. ie. it wasn't a mere intention, but an intention backed up with action.