Interest While Building

dta28105 · 2nd Jan, 2008

Good morning

I am in the process of building an IP in Brisbane at the moment

. I'm almost positive that I have read on this site (can't find it now) that the interest whilst building is tax deductable as long as your intention for building that property is for rental. I had a discussion with a friend yesterday who is an accountant (not a tax accountant) and she seemed to think that it was not deductable

.

I'm now confused?

Help appreciated.

Regards

Dan

Peter_Tersteeg · 2nd Jan, 2008

This is an accountant question, so you should ask your accountant specifically, but I know of plenty of people who have claimed the interest and other costs during the construction period of an investment property.

Mry · 3rd Jan, 2008

If your intention while building is to use the property as a rental when it is finished, it is deductible.

http://www.ato.gov.au/individuals/content.asp?doc=/content/00096828.htm&page=8

ATO said:
Similarly, if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out.

phil · 3rd Jan, 2008

Does that mean for example that a loan for a vacant block of land that I have paid interest on for the past three years, (which was always going to be used to build an IP on) is tax deductable, or is it only from the period from when I commence construction?

Cheers,
Phil

Mry · 3rd Jan, 2008

Yes, it is deductible Phil.

phil · 3rd Jan, 2008

Thanks

Mry said:
Yes, it is deductible Phil.

WooHoo. Thanks for that.

Phil

jaycee · 3rd Jan, 2008

what if one bought a block of land, claimed interest for 2 years, but then changed plans and sold the block instead of building on it ? the 2 years of interest has already been claimed (and spent!)..

dta28105 · 22nd Jun, 2008

Further to this I see now in the PIA software update there is now a section for calculating your holding costs when building - very useful

.

I note that it gives you the option to take the holding costs as an immediate deduction in the first year, or for the costs to be added to the capital cost.

However, in Jan Somers book "More Wealth from Residential Property" it states on page 188 that interest "....may be added as a capital cost until it [the building process] is finished."

I'm a little confused about this now. I guess I will find out next month when I get my tax done, but happy to hear any of your thoughts?

Regards

Dan

Perchy · 22nd Jun, 2008

what if one bought a block of land, claimed interest for 2 years, but then changed plans and sold the block instead of building on it ? the 2 years of interest has already been claimed (and spent!)..

I asked my friend who is a lawyer for ATO this once (had this same brilliant idea) - no it is NOT deductible and any deduction must be paid back

roberto · 22nd Jun, 2008

Hi

This what the ATO says on its web site:

... , if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out. However, if your intention changes – for example, you decide to use the property for private purposes and you no longer intend to use it to produce rent or other income – you cannot claim the interest after your intention changes.

It doesn´t mention any limit of time. I am assuming two years until the house is completed shoud be a ok period to claim the interest.

Cheers,

Roberto

Mry · 23rd Jun, 2008

The ability of a taxpayer to claim interest depending on their intention is clear cut for me as an accountant. If you intend to rent it out, deductible.

However, people change their intentions on what they do with the property, which changes the way the GST and interest is claimed. This is very very messy. For example, I have a client that decided to rent out his residential buildings, changed his mind and decided to sell them, then had trouble selling them and decided to rent them out. GST treatment had to change, adjustment periods came into play, the tax treatment changed, yuck what a nightmare.

As soon as you decide to sell a unit, unless you are in the business of buying and selling property the interest ceases to be deductible and is added to the cost base of the property.

SupaRex · 26th Jun, 2008

Reading this:

... , if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out. However, if your intention changes – for example, you decide to use the property for private purposes and you no longer intend to use it to produce rent or other income – you cannot claim the interest after your intention changes.

From the ATO, it seems to me that you could claim the two years interest and that you would only have to stop when your intention changed. Is that right?

landlubber · 29th Jun, 2008

SupaRex said:
Reading this:
... , if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out.

Correct.

SupaRex said:
..However, if your intention changes – for example, you decide to use the property for private purposes and you no longer intend to use it to produce rent or other income – you cannot claim the interest after your intention changes.

Also correct ..as SOON as your INTENTION changes from income production (..to private use .e.g.) you loose the deductibility.

SupaRex said:
.. From the ATO, it seems to me that you could claim the two years interest and that you would only have to stop when your intention changed. Is that right?

Yep.. spot on. Say your intentions were to build an IP, then you decided to sell the land. Interest is deductible UNTIL the moment you decide to sell. At that moment your INTENTION ceases to be related to income production ..which is the reason the ( very kind & humane

) ATO is giving you the tax deduction.
( Better have those intentions well documented lads if audited ..letters to accountant, business plans, meetings with agents !!!!!)

This subject ( interest on vacant land etc) has been right to the High Court and "done to death" in Steele's case. Mrs. Steele won the day. The ATO web-site has it well documented.
LL

Perp · 29th Jun, 2008

Mry said:
As soon as you decide to sell a unit, unless you are in the business of buying and selling property the interest ceases to be deductible and is added to the cost base of the property.

landlubber said:
Interest is deductible UNTIL the moment you decide to sell.

So if I buy a block of land to build an IP on, and hold it for 2 years planning to build, then change my mind, put it on the market, and settle the sale 6 weeks later, does that mean that I really have to forgo deducting that last 6 weeks of interest?

That seems ridiculous - though of course there are often ridiculous implications of laws!

landlubber · 29th Jun, 2008

ozperp said:
So if I buy a block of land to build an IP on, and hold it for 2 years planning to build, then change my mind, put it on the market, and settle the sale 6 weeks later, does that mean that I really have to forgo deducting that last 6 weeks of interest?

That seems ridiculous - though of course there are often ridiculous implications of laws!

In general ... correct. ( Actually, you would need to forgo the six weeks settlement period, plus the "x" weeks before that (.. the period you had the land on the market) , plus the "y" weeks before THAT ( the actual time since you changed intentions.) Yes, yes , yes .. I know it's crazy ozperp, don't hang me out to dry, I'm just explaining the theory. In a lot of tax stuff, the critical word is "intentions".

LL
PS I had this situation on a reno and a huge fight with my accountant at the time Steele's case was "going down". It was a delight to insert the final outcome in his personal exit shute. Carefully folded of course

.

Perp · 29th Jun, 2008

landlubber said:
In general ... correct. ( Actually, you would need to forgo the six weeks settlement period, plus the "x" weeks before that (.. the period you had the land on the market) , plus the "y" weeks before THAT ( the actual time since you changed intentions.) Yes, yes , yes .. I know it's crazy ozperp, don't hang me out to dry, I'm just explaining the theory.

I'm not about to blame you for the peculiarities of our tax system, LL! I'm just trying to think if I've ever filed incorrectly based on misunderstanding this principle... but I don't think so. Whew!

Interest While Building

More options

dta28105

Peter_Tersteeg

Mry

phil

Mry

phil

jaycee

dta28105

Perchy

roberto

Mry

SupaRex

landlubber

Perp

landlubber

Perp

Similar threads