Join Australia's most dynamic and respected property investment community

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 Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,043
    Location:
    Sydney
    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.
     
    chylld and Simon Moore like this.
  2. chylld

    chylld Well-Known Member

    Joined:
    25th Jun, 2015
    Posts:
    596
    Location:
    Sydney
    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 Mortgage Broker - Melbourne Business Member

    Joined:
    4th Mar, 2016
    Posts:
    231
    Location:
    Melbourne
    Thanks for the tip @Terry_w.

    I was wondering, say you have it available to rent for short term stay ie Airbnb. How would it work then?
     
  4. Marg4000

    Marg4000 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    937
    Location:
    Qld
    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. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,400
    Location:
    Sydney
    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 Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,043
    Location:
    Sydney
    Yes
     
    chylld likes this.