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Tax Tip 126: Interest Deductibility when property for sale and untenanted

Discussion in 'Accounting & Tax' started by Terry_w, 20th May, 2016.

  1. Terry_w

    Terry_w Well-Known Member Business Member

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    Interest Deductibility when property for sale and untenanted

    Interest is only deductible if it relates to the production of income. That means if there is no tenant and the owner is not actively trying to find one then the interest won’t be deductible.


    Example

    John had an investment property which he wanted to sell and he thought it would be easier to sell if he had no tenants in it. So he asked the tenants to leave and put the property on the market. But it ended up taking 6 months to sell. Can John deduct the interest incurred after not having any tenants?


    Generally not. The property is not available to rent and not being advertised to find tenants so the interest does not relate to the generation of income.


    However, the interest during this period may be deducted against the capital gains of the property because of s110-45, i.e. the interest will form part of the cost base. This is not ideal as the 50% CGT discount will reduce the savings.
     
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  2. chylld

    chylld Well-Known Member

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    So once the last tenant moves out, interest on IP borrowings become non-deductible? And instead adds to the cost base for calculating CG?
     
  3. Simon Moore

    Simon Moore Residential & Commercial Mortgage Broker Business Member

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  4. Marg4000

    Marg4000 Well-Known Member

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    For a start, you would have to fully furnish it down to knives and forks.

    Then you would not be able to show buyers through when occupied.

    Probably more trouble and expense than it is worth.
    Marg
     
  5. And have actual occupancy after final tenant and not just be listed. The words "available for rent" cant be taken too literally. Its not 'advertised for rent'

    The same issue can apply to a fixed rate loan and break costs. Lets say its been rented 2.5 years and you want tenant out and then sold. Breaking the loan when sale is settled would be a capital gains adjustment where breaking the loan at time of tenancy would be deductible.
     
  6. Terry_w

    Terry_w Well-Known Member Business Member

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    Yes
     
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  7. dean2012ad

    dean2012ad Active Member

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    What about deductibility of interest in house renovation period before moving into IP making it the PPOR?
    However, having a secondary dwelling on property (granny flat) earning income while main residence being renovated. So in the period the property was always an income producing asset..
    Is the interest in this period deductible?
     
  8. Terry_w

    Terry_w Well-Known Member Business Member

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    Once the tenants move out the interest could not be claimed against income.

    But if there is a granny flat and a portion of hte loan relates to this then the interest on this poriton may be deductible if the granny flat remains rented out.
     
  9. dean2012ad

    dean2012ad Active Member

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    Thanks Terry. A Property must be either earning an income, be available, working towards or be eventually income producing to claim interest deductions.
     
  10. A related tip concerns ensuring fixed rate loans are broken while tenanted and not after. The break costs become a CGT cost if its incurred when sale settles. But if the break occurs earlier when tenanted its deductible

    Video 6 in the Property Investor Tax Series playlist explains the concepts
    Rental Property - Tax Issues - YouTube