Private ruling: Rental property expenses/deductions
Date of advice: 1 February 2018
Published: June 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021
Date scheme commenced: 1 July 2017

Ruling: Question and Answer | Are you entitled to continue to claim a deduction for the interest expenses on your rental property loan if the property is sold at a loss? | Yes.

Relevant facts and circumstances: You and your spouse purchased an investment property (the property). The purchase price of the property was approximately $X. Your ownership interest in the property is X% and your spouse’s ownership interest is X%. The market price of the property is currently around $X. You cannot afford to keep the property. However, selling it will incur significant capital loss. All bank finance is directly traceable to the mortgage on the property. Proceeds from the sale will be paid directly onto that mortgage. You will be left with an outstanding debt for several years. The loan is services via a joint back account held with your spouse. You make most of the payments in relation to the loan.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Detailed Reasoning - Deductibility of interest expenses: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Expenses incurred relating to a rental property are deductible under section 8-1 of the ITAA 1997 if the property is rented or available for rent in the income year in which you claim the deduction. Interest on loan used to purchase a property which is rented or available for rent is an allowable deduction under section 8-1 of the ITAA 1997. You purchased a property (with your spouse) with borrowed money with the purpose of producing assessable by renting it. As the property has been rented or available for rent, you are entitled to a deduction for the interest expenses you incur for the loan. | Detailed Reasoning - Deductibility of interest expenses after a property is sold.: The deductibility of interest payments after a rental property is sold is addressed in Taxation Ruling TR 2004/4: Deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities (TR 2004/4). Paragraphs 10 and 11 state: 10. Where interest has been incurred over a period after the relevant borrowings (or assets representing those borrowings) have been lost to the taxpayer and relevant income earning activities (whether business or non-business) have ceased, it is apparent that the interest is not incurred in gaining or producing the assessable income of that period or any future period. However, the outgoing will still have been incurred in gaining or producing ‘the assessable income’ if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period. 11. Whether or not the occasion of the outgoing of interest is to be found in what was productive of assessable income of an earlier period requires a judgment about the nexus between the outgoing and the income earning activities. In your case, the occasion of the outgoing of interest is servicing the loan used to purchase the rental property which produces assessable income. As such, there is a clear nexus between your income producing activity and your liability to pay interest. You cannot afford to keep the property so you have decided to sell it. The proceeds of the sale of the property will go towards paying off the loan. However, you expect to incur a substantial loss on the sale of the property. After paying the proceeds of the sale off your loan, you will still owe a substantial amount to the bank for which you will continue to incur the liability to pay interest. As the ongoing liability to pay interest will continue to relate solely to the property for which the loan was obtained, you will be entitled to continue to claim a deduction for your share of the interest expenses on the outstanding part of the loan after you have sold the property and paid the proceed off your mortgage. As your ownership interest in the property is X% you will be entitled to claim a deduction for X% of the outstanding interest liability.