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Dedutibility of interest

Discussion in 'Accounting, Tax & Legal' started by alby.grey, 12th Aug, 2010.

  1. alby.grey

    alby.grey New Member

    12th Aug, 2010
    I was about to buy a property, renovate it and sell. Initial plans were for a total project of around 15 months from buy to sell.

    However, planning & permits alone will take 12 to 18 months and so I've decided to rent the property prior to works commencing. This will also help with cashflow. Depending on the renovation, I may then decide to rent again or sell.

    In the first case, interest would be added to the cost base and would reduce any capital gains on disposal (as opposed to being deductible).

    In the second case, interest while the property is rented would be deductible, but what about after? Does interest continue to be deductible during the renovation phase on the basis the property will be rented again?

    Any recommendations?

    Thanks in advance.
  2. Rob G.

    Rob G. Well-Known Member

    6th Jun, 2007
    Melbourne, VIC
    1) Intention to purchase for resale at a profit may be a business or at least a speculative profit transaction.

    The ATO might treat any gains as ordinary income, not CGT (and therefore no discount).

    If it is an income activity, interest would be deductible ... but perhaps more like a set-off (i.e. net basis), or even deferred, depending on how your activity is assessed.

    However, interest will be added to the cost base if you are treated as an investor deriving purely a capital gain.

    You need to talk to an Accountant about your details and plans.

    2) A property rented on an arm's length basis would allow an immediate deduction of interest because this is also an income producing activity.