Claiming loan interest while building an investment property

Section 26-102 can deny deductions for certain costs associated with holding vacant land, including interest on borrowings used to acquire land, council rates, land tax and maintenance costs. Where an expense is not immediately deductible, its treatment for capital gains tax purposes may also need to be considered.

TR 2023/3 distinguishes these land holding costs from costs associated with constructing a building.

Interest on borrowings used to construct a future rental property may therefore fall outside the vacant land holding cost rules to the extent the borrowing relates to construction.

The next question is whether the interest qualifies for a deduction under section 8-1.

For an investor, this means the fact that money was borrowed to build a property is not enough on its own. There needs to be a sufficient connection between the interest expense and the investor’s intention to use the completed property to produce assessable rental income.

Interest does not necessarily have to be incurred after a property starts earning rent to be deductible. In some circumstances, interest incurred during construction may qualify where the investor can demonstrate that the borrowing relates to a property being developed for future income-producing use.

Evidence becomes particularly important during this period.

Investors should consider whether their records demonstrate:

Useful records may include building contracts, loan and drawdown documents, builder invoices, progress payment records, rental appraisals, correspondence with property managers and documents relating to construction milestones.

The connection with future rental income may be more difficult to establish where a project remains preliminary, has no clear construction timeframe or experiences extended periods of inactivity without evidence that the investor is continuing to pursue the development.

Construction delays do not necessarily prevent a deduction. Delays caused by council approvals, weather, builder availability or supply issues may still be consistent with an ongoing intention to construct and rent the property.

However, the longer or less certain the project becomes, the more important contemporaneous records can be.

If the investor's plans change and the property is instead intended for private use or another purpose, the deductibility of interest may need to be reconsidered from the time that intention changes.

How a construction project is financed can affect both the tax treatment of interest and how easily a claim can be substantiated.

A separate construction loan, for example, can make it easier to trace drawdowns to builder invoices, progress payments and other construction expenditure.

The position can become more complicated when the same loan is used to acquire the vacant land and fund construction.

Interest attributable to the acquisition or holding of vacant land may be treated differently from interest associated with constructing the future rental property. This can mean the interest expense needs to be apportioned.

Investors should retain records showing:

Redraw facilities, mixed-purpose loans, refinancing and loan consolidation can make tracing the original use of borrowed funds more difficult.

Where one facility has been used for several purposes, investors should speak with their accountant about the appropriate treatment and any apportionment required.

Another important date is when construction finishes and the property can legally be occupied.

TR 2023/3 explains that newly constructed residential premises generally need to be lawfully capable of occupation before they can be available for lease. Depending on the property and jurisdiction, this may involve an occupancy certificate or another relevant approval.

This date can have different implications for different property-related deductions.

Interest incurred during construction still needs to be considered under the relevant deduction rules, while depreciation generally begins when eligible assets and capital works are used to produce assessable income or are installed ready for use for that purpose.

For investors, keeping records of completion dates, occupancy approvals and when the property was first advertised or otherwise made available for rent can help establish when different claims begin.

Once a newly built investment property is complete and used for income-producing purposes, depreciation will become an important part of the investor's overall tax position.

A tax depreciation schedule identifies eligible capital works deductions for the building structure and plant and equipment deductions for qualifying assets. Construction costs, finishes, fixtures and installed assets can all affect the deductions available.

BMT Tax Depreciation assesses the property and relevant construction information, identifies eligible depreciable items and calculates the deductions available over their effective lives.

Did you know?

For brand new investment properties, the deductions can be significant. BMT data for the 2025–26 financial year found an average first full financial year depreciation deduction of more than $18,000 for brand new properties.

Having a tax depreciation schedule prepared when the property begins its income-producing life gives the investor and their accountant property-specific figures to use when preparing future tax returns. The schedule can also assist with subsequent property reviews, updates and Capital Gains Tax calculations.

Construction loan interest may be deductible in some circumstances, but falling outside the vacant land rules does not automatically make it claimable. Investors still need to satisfy the general deduction rules and keep clear records showing the connection between the borrowing and the property’s future income-producing use. Your accountant can confirm how these rules apply to your circumstances.

Once construction is complete and the property is used for income-producing purposes, a tax depreciation schedule can help identify eligible capital works and plant and equipment deductions. Request a Quote from BMT Tax Depreciation or call 1300 728 726 to get started.

Disclaimer: This information is general in nature and does not consider your personal circumstances. Tax outcomes depend on individual situations and current legislation. You should seek independent advice from your accountant before making decisions based on this information.