negative gearing a newly built property



From: Eddy Morris

Hi all,
Its been ages since Ive been in here but I have a question.
I am interested in buying 1.5 acres in a NSW coastal town. Then 6 months later I willhave built a home on it. I know you cannot negatively gear the complete property until the house is rentable, but can you claim the first 6 months of interest you would have paid waiting for the house to be built?
In advance, thank you!

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Reply: 1
From: Dale Gatherum-Goss

Hi Eddy!

This exact issue has been addressed in the courts lately (last 12 months) and it was decided that no, in this instance, the interest has more to do with building the units than generating an income from them. Therefore, the interest would be added to the costs of buying/building the units and not an immediate tax deduction.

Good luck and seek further advice on this matter if you will.

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Reply: 1.1
From: Sergey Golovin

Hi Dale,

How does final cost of the property fits into whole picture - will that cost be depreciated at 2.5% as whole house/unit block or does it brakes down onto number of "components"?

Let say cost of land $100K + cost to build house/block $300K = $400K total.

Where cost of the unit block it self in turn will break down to $100K let say all costs and interests associated with it and $200K building it self.

I do understand that this is not an advice. All I'm after I guess is to try to understand how it works. Do not worry about precise figures please.

Thanks in advance.

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Reply: 1.1.1
From: Dale Gatherum-Goss

Hi Serge!

The land is ignored and does not form part of the "cost of construction" at all.

So, when the Certificate of occupancy is available, we get the builder to provide the details of the cost of construction excluding things like his profit margin, the cost of the land etc and then use this figure to claim the 2.5% depreciation allowance.

If the builder will not, or cannot, provide this information, then, a QS will estimate the information, as you know.

Does this help? I hope so, but feel free to ask for more clarification.

have fun

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Reply: 2
From: Eddy Morris

In buying the 1.5 acres and putting a completed house on it within 6 months, I now have two options:

1. Do everything by the book and get a builder to build the house for, say $120K, or

2. Owner build..using the same builder but paying cash for everything..doing this latter way I will save $20K. Anyone see any problems in going this latter way?

Thanks all,

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Reply: 3
From: Marina .

Interest on a loan taken out to fund the purchase of vacant land held for future income producing use is deductible under section 8-1.

Eg. Taxpayer borrowed funds and purchased land with the intent to build an IP.
The taxpayer incurred interest expenses on the borrowed funds.
For financial reasons the taxpayer was unable to commence actual development for a period of 4 years.

The ATO states the length of time between purchase of the property and commencement of construction is not consideredto have been so long that the necessary connection between the interest outgoings and the assessable income is lost.

In these circumstances the taxpayer is entitled to a deduction for the interest expense.

Date of this decision is 1st of August 2001 and is current.
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