Interest payment deductability during the contruction phase of investment property

Hi all,

Happy Easter !!!!!!

I would like to clarify, if is it possible to deduct the mortgage interest payments at annual tax return for an investment property during construction phase? if so which loan portions can I deduct: interest on land or interest on building constructions? If I want to move to my investment property later (e.g. after 2years?) would that have any impact later?

Thanks in advance !!!
Dan

 

Unless you are a company interest is no longer deductible until there is a dwelling available for rent

 

Thanks so much for the quick response.

In the below two links (first one is in ATO community page), they mention that the construction loan interest is deductible for investment properties - it is 3 year old post. Have the law's changed recently in the last 3 years?

Answered: construction cost interest for house and land rent... - ATO Community

Tax Q&A: Can you claim pre-purchase expenses?

Cheers
Dan

 

I think they actually did. Off the top of my head it was a 2019 thing?

 

INCOME TAX ASSESSMENT ACT 1997 - SECT 26.102 Expenses associated with holding vacant land

 

How about for a granny flat construction loan?

 

the good old ATO community posts...it is actually a great resource...unfortunately with changes in legislation some of the advice is now irrelevant.

 

What happens if you decide to sell a rental property. That is, you get the tenants to vacate, you then market the property for 4 weeks, sell it, then settle in another 8 weeks after that . So, there are 12 weeks without any rental income. Are the interest payments during that 12 weeks tax deductible?

 

No as there is no income associated with it. You could claim it against the CGT though as a cost base expense, but that generally means the 50% reduction makes you lose half the benefit.

 

The holding costs incl interest and share of rates etc is likely deductible since the 1 July 2019 changes impact "vacant land" and the existing dwelling may avoid that requirement IF it is pre-existing at the time the GF is constructed. If both are constructed at the same time no holding costs are deductible.

This rule also affects knock down rebuids.

 

Thanks Paul for the confirmation, good to know it’s deductible in this case as the existing property is currently tenanted

 

Company owners may be unaffected by this change. Trusts and SMSFs and unitholders to a unit trust and discretionary and hybrid trusts are impacted.
Land used by a business (or an associate) is also unaffected. However this is not as simple as it seems. A small developer conducting a isolated profit making activity might NOT be conducting a business. Specific tax advice is wise.

What is vacant land?
Land will be considered vacant during the period the entity held the land if:

• it did not contain a substantial and permanent structure
• it contains a substantial and permanent structure and the structure is a residential premises which was constructed or substantially renovated while the entity held the land and the premises are either
  • not yet lawfully able to be occupied
  • lawfully able to be occupied but not yet rented or made available for rent.

A structure is not substantial and permanent if it only has value as an addition to another structure. eg A existing 2 bedroom dwelling is acquired and renovation project intended to make this a 3 bedroom + rumpus house.

Structures that are not substantial and permanent include:

• a residential garage or shed
• a letterbox
• pipes and powerlines
• residential landscaping.

I have yet to see a request for a ruling for a site which contains a old house + granny flat and the GF is retained and the house demolished. Is a GF a substantial and permanent structure ?? We do know that provided the GF is leased or occupied then it may be satisfied. However is a GF "permanent"? And is it also substantial ?

There can also be concerns for a substantial renovation. I say substantial as the accepted approach adopts the same as the GST laws for what a substantial reno may be.
Substantial renovations of a building are renovations in which all or substantially all of a building is removed or is replaced. The renovations may, but do not have to, include the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. The term 'substantial renovations' is defined in section 195-1 of the GST Act.
Specific advice based on approved plans and expected construction approach may be required. eg a gutted shell . Projects that completely change a building charecter may also be impacted eg warehouse to residential conversion.