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Tax Tip 38: Interest on Construction of an investment property

Discussion in 'Accounting & Tax' started by Terry_w, 15th Sep, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Interest on Construction of an investment property.


    Generally interest will be deductible during construction in the following circumstances:

    - interest is not incurred 'too soon', is not preliminary to the income earning activities and is not a prelude to those activities;

    - the interest is not private or domestic;

    - the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost;

    -the interest is incurred with one end in view, the gaining or producing of assessable income; and

    - continuing efforts are undertaken in pursuit of that end.


    Rates, land tax etc can also be deductible


    But capital works deductions won’t be available until the property is rented.
     
    a89moh and Baker like this.
  2. aujahua

    aujahua Member

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    Hi Terry,

    If I have a investment property and it has been rented out for a year. Then I have decided to knock it down a rebuild the house for investment purpose.

    After construction complete, I have decided to move in and make it my PPOR. Would the interests I paid during construction period still deductible ?
     
  3. Biz

    Biz Well-Known Member

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    Doesn't a property have to be earning income for the interest to be deductable?
     
  4. shorty

    shorty Well-Known Member

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    @aujuhua - no. It's your PPOR, how could it be deductible?
     
  5. JohnPropChat

    JohnPropChat Well-Known Member

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    But it was an investment property before and during construction. So after the construction is complete, if one rents it out for a short while may be the interest during construction is deductible?
     
  6. Sonamic

    Sonamic Well-Known Member

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    You would have to rent it out after completing construction to Qualify as an Income Producing Asset and thus ensure Deductibility. Seems a lot of hassle to write of a few months Interest?
     
  7. aujahua

    aujahua Member

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    That is exactly what my question is. Let's say after consturction complete, how long do i need to rent it out to be able to claim the interest during construction period?
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No. As there is no income associated with the borrowings.
     
  9. Wandercro

    Wandercro Active Member

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    Terry,

    My scenario is that I am in the process of purchasing a property for investment. The property MUST have work done to it before anyone can move into it. This was taken into consideration when the offer was made and reduction in offer sort after building inspection was done. Where do I stand with this? Can I claim interest on the funds used to renovate the property?
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Same principals would apply as for a construction of an IP. Same points as the opening post.
     
  11. GoOnAndTell

    GoOnAndTell Well-Known Member

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    assuming the unit built is held and rented after completion is the interest typically tax deductible in the year(s) or is it held over until the property is sold and added to its capital cost?
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I covered this in the first post.
     
  13. GoOnAndTell

    GoOnAndTell Well-Known Member

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    sorry not following some of the language used.
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Interest will generally be deductible where you are building an invesent property and intend to rent it out from the beginning. But seek advice before hand.
     
  15. Byeow

    Byeow Member

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    Interest on Construction of an investment property:

    Hmm, sounds too good to be true. Geez so much to learn.

    Terry, Could you please kindly confirm my understanding on this.Since it sounds too good to be true.

    Let say my IP has been rented out for 3 years. Then I decided to knock down and rebuild OR do a huge renovation.
    So the IP can't be rented out say for 10 mths due to construction work.


    For that 10 mths, can the interest incurred from my IP loan be tax deductible even though the property can't be rented out.

    After 10 mths I rent the property out again.
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes

    Generally interest will be deductible during construction in the following circumstances:

    - interest is not incurred 'too soon', is not preliminary to the income earning activities and is not a prelude to those activities;

    - the interest is not private or domestic;

    - the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost;

    -the interest is incurred with one end in view, the gaining or producing of assessable income; and

    - continuing efforts are undertaken in pursuit of that end.
     
  17. Byeow

    Byeow Member

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    Does it also apply to the interest on the existing IP loan?. I will take additional loan for the construction work. (the interest is deductible as per your listed circumstances).

    Was wondering about the existing IP loan that I took to purchase the IP since my IP will not be available for rent during construction period.

    Just wanted to clarify the bit on the existing IP loan.

    THanks
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes as long as all of those points apply. Check with your tax advisor.
     
  19. Byeow

    Byeow Member

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    Thanks Terry for creating this thread.
    Now i know. :)

    I just noticed that ATO stated this point in their yearly tax guide for rental properties. Quite clearly.

    Lol i always assume u can't since the IP will not availble for rental due to major reno work for example.

    But as long as the intention to rent it out once done is there i can claim.

    Not only the interest rate expense i can also claim rates etc.the usual IP expense.
     
  20. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    There may also be scrapping deductions available.