Deductibility of interest - Construction of Rental Property

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Claiming Interest on your Investment Property:

There has been a quantum shift in the view of detectability of interest expense during the construction period of an investment property construction project. The shift from the ATO’s traditional view to the current position is good news for property investors.

Typical scenario >>> Investor purchases land, constructs a dwelling and, on completion of construction, rents the property for the market rate.

The traditional view in this scenario was interest (and borrowing costs) was not deductible as there was no connection between income until the property became available for rent. In other words, the interest expense was incurred too early to be deductible. Instead, the interest expense was treated as a capital cost which formed part of the cost base of the project for Capital Gains Tax (CGT) purposes and tax detectability against other income was either lost or deferred.

A recent court case and subsequent Australian Taxation office (ATO) rulings and interpretive decisions has changed that view. The current view in this scenario is that interest is deductible, providing certain circumstances apply.

Providing property investors meet those circumstances interest expenses incurred on borrowings used for the construction of a rental property should be deductible from the outset of the loan.

For more details you can access our full commentary here "Taxation and investment Properties Explained".

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