Tax Deductions During House Construction for Rental Properties

If you're building a house to use as a rental property, you might be wondering about the tax deductions you can claim during the construction phase. While this can be a complex area, I'm here to break it down for you in a simple way. Let's look at what costs are deductible, identify common traps, and provide examples to guide you through the process.

Deductible Costs During Construction

When constructing a rental property, certain costs can be claimed as tax deductions, even if you don’t have a tenant yet. Here's a breakdown of what you can typically deduct:

1. Borrowing Costs: These include loan establishment fees, title search fees, and costs for preparing and filing mortgage documents. These expenses are usually spread over the life of the loan or five years, whichever is shorter. They are deductible over the 5 year rule, so they are apportioned during the construction phase.  And continue to be deductible once the property is available for rent.

   Example: If you incur $1,500 in borrowing costs, you can claim $300 per year over five years. Pro-rated during a year.  You may deduct the costs during the construction phase (prorated) and further deductible once the property is held available for rent.

2. Interest on Loans: Interest on loans used to finance the construction can be claimed as a tax deduction during the construction phase. However, this only applies if the loan is solely for the rental property construction. Deductions for interest on the Land are NOT tax deductible.  Rates, maintenance and insurance relate to the land and are not tax deductible.  They are however, including the interest on the Land loan for part of the cost base for capital gains purposes.

   Example: If you pay $10,000 in interest during construction, this amount is deductible.

3. Other Deductible Expenses: Council rates, water charges, and insurance cannot be claimed if they are incurred during the construction phase and relate to the rental property. These are added to your capital gains cost base (so keep the records).

Traps to Avoid

1. Vacant Land Rules: The ATO has specific rules for vacant land. If your land doesn’t have a substantial and permanent structure, you generally can't claim deductions until the property is genuinely available for rent.

2. Personal Use: If you use the property for personal purposes during construction, you can't claim deductions for that period.

3. Apportioning Costs: Ensure you only claim the portion of expenses that relate to the rental property. Mixed-use loans need careful apportioning and perferable if your land loan is ititally separate.

Non-Deductible Examples

• Initial Construction Costs: The actual costs of building the property, such as materials and labour, are capital in nature and not immediately deductible. These are added to the property's cost base for capital gains tax purposes.  Building write off provisions apply.

• Landscaping and Fencing: Costs for landscaping or fencing during construction are not deductible but can be added to the property's cost base.

Gotax Deduction Grabber App

To efficiently track all your tax-related expenses throughout the year, consider using the Gotax Deduction Grabber App. This app provides all the logbooks and tax expense recording systems you need to record your tax deductions. By scanning the QR code, you can download the app and start managing your expenses like a pro.

Gotax Tax Advice

Here's a piece of Gotax advice to embrace: While constructing a rental property, keep detailed records of all expenses. This not only helps in claiming the right tax deductions but also aids in calculating the property's cost base for future capital gains tax purposes. Always consult a tax professional to ensure compliance with ATO rules and to maximise your tax benefits.

Conclusion

Understanding the tax deductions available during the construction of a rental property can help you manage your finances more effectively. For more insights and to explore Australia's easiest, cheapest, and smartest online tax service, visit www.gotax.com.au.

Gotax.com.au Australia's easiest, cheapest, smartest (Ai) Phoebe online tax service.

Gotax, Online Tax Experts. Maximise your Refund… 2025 Complete Return $65, Simple Return $25. Small Business $140, Rental $109+.