Tax-smart Deductions for Property Investors

Great news for property investors: recent findings by Optiwise Wealth Advisory have uncovered clarification on a recent tax ruling where you can claim interest on the construction loan component of your loan/s as a tax deduction when you intend to rent out the property on completion as a residential investment property.

This is a significant change from the previous understanding, which stemmed from the 2019 tax law amendments on vacant land where expenses were severely restricted by the Australian Taxation Office (ATO), specifically regarding the expenses relating to the vacant land held for constructing a residential rental property.

The tax law amendments implied that you were unable to claim a deduction for expenses relating to the land until the dwelling was built and available for rent. However, here is where it gets exciting…

The draft tax ruling (and the finalised ruling TR 2023/3) (deets below in the fine print so you know where to find it to show your accountant, or come see us), state that you cannot deduct costs related to purchasing the land such as council rates, land taxes, maintenance, and interest until the property is available for rent or is rented out. However, with this new clarification, we can see that the tax ruling allows you to claim the interest expenses relating to the construction costs of the loan as a tax deduction if you intend to rent out the property on completion.

Even if the loan is a combined house and land construction loan, the interest can be apportioned and the interest relating to the construction of the dwelling can be a tax deduction prior to the dwelling being completed!

Let’s break it down with a simple example. Mallory buys a vacant lot and plans to build a rental property. She takes out two loans: one for the land and one for construction. She can’t claim the interest on the land loan as a tax deduction until the dwelling is available for rent/tenants have moved in. However, the interest incurred on the construction loan is tax deductible as she has the intention to rent the dwelling out as a residential investment property. Once the dwelling has been completed and is available for rent/tenants have moved in, the interest can be claimed on both the land and construction loans.

This clarification addresses a key issue: Many accountants and investors have the understanding that construction-related interest cannot be claimed as a tax deduction until the dwelling is available for rent/tenants have moved in and investors could only claim tax deductions on costs incurred after the tenants moved in. This is simply not the case!

This clarification is designed to encourage supply and make things easier for investors.

Together with our colleagues at Optiwise Wealth Advisory, we bring experience and insights to give you confidence in trusted partners in every aspect of your financial journey. Together, we’ll create a secure and prosperous future for today, tomorrow and all the days we partner with you on this journey.

Disclaimer: The information contained in this article is for general information purposes only. The information should only be used as a guide and does not constitute any recommendation or advice. You should seek independent professional tax advice for your individual circumstances.

Sources: TR 2023/3 | Legal database (ato.gov.au), TR 2021/D5 (Finalised) | Legal database (ato.gov.au)