Private ruling: Rental deductions - interest expenses
Date of advice: 12 December 2025
Published: 9 February 2026
Ruling period: Year ended 30 June 20XX | The scheme commence on: | 1 July 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you claim the full amount of mortgage interest paid on your combined land and construction loan prior to using the property to earn assessable income? | A1: No. | Q2: Can you claim the interest that correlates to the construction portion of your combined land and construction loan prior to using the property to earn assessable income | A2: Yes.

Relevant facts and circumstances: You own a residential investment property with your partner as joint tenants. You acquired the property as a house and land package for investment purposes only. The property is located in State A (the property). In mid 20XX, you signed a preliminary document relating to acquiring the property as a house and land package. Several months later, the land settled. In the same month, you signed a fixed-price building contract for construction of the house on the property. You obtained single investment loan facility to finance both the land purchase and the construction costs. The loan commenced several months after you signed the construction contract. You drew down an amount of the loan equivalent to the purchase price of the land less the deposit already paid. You had previously paid a deposit to secure purchase of the land. You progressively drew down the loan to finance construction of the property. You have maintained a balance equivalent to the cost of the land in your offset account from the date advised. This balance is equivalent to the cost of the purchase price of the land. You signed an agreement with a licensed real estate agent to rent the property. The following month, the property was completed and was genuinely available for rent. After a few weeks, a tenant signed a lease. The property is now rented out and generating assessable income.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 26-102

Reasons for decision: Summary: You can't claim a deduction for all of the interest incurred on the loan prior to the use of the property to earn assessable income. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings 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. Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith provides the Commissioner's view regarding the deductibility of interest expenses. As broadly outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income (paragraph 3(a) and paragraph 21). TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put (paragraph 3(b)). Subsection 26-102(1) of the ITAA 1997 provides that if: a) at a particular time, you incur a loss or outgoing relating to holding land (including any interest or any other ongoing costs of borrowing to acquire the land); and b) at the earlier of the following (the critical time): i. that time, ii. if you have ceased to hold the land - the time just before you ceased to hold the land. there is no substantial and permanent structure in use or available for use on the land having a purpose that is independent of, and not incidental to, the purpose of any other structure or proposed structure, you can only deduct under this Act the loss or outgoing to the extent that the land is in use, or available for use, in carrying on a business covered by subsection (2) at the time applying under subsection (3). Paragraph 26 of Taxation Ruling TR 2023/3 Income tax: expenses associated with holding vacant land states that, in the context of section 26-102 of the ITAA 1997, the costs of constructing a substantial and permanent structure on the land, or any interest or borrowing costs (to the extent they are associated with construction) are not considered a loss or outgoing related to holding land (see Example 6 in paragraph 27 of TR 2023/3. This means that a taxpayer who incurs interest and borrowing costs directly related to the construction can still claim deductions for such expenses. | Detailed Reasoning - Application to your circumstances: You incur interest expenses on a combined land and construction loan used in connection with the earning of assessable income. As you are not carrying on a business of the type covered by subsection 26-102(2) of the ITAA 1997 at the time applying under subsection (3), you are unable to claim a deduction for all of the interest incurred on your loan as it encompasses the purchase of vacant land and the construction of a dwelling. | Summary: You can claim the interest that correlates to the construction portion of your combined land and construction loan prior to using the property to earn assessable income. | Detailed Reasoning - Detailed reasoning: Section 26-102 of the ITAA 1997 does not prevent you from claiming a deduction for the interest component of a loan used to fund construction of a dwelling used as an investment property. Where a borrowing is used to acquire an income producing asset, the interest on this borrowing is considered to be incurred in the course of producing assessable income. Interest on the proportion of the funds borrowed for the construction of a dwelling is deductible prior to the earning of assessable income following the principles in Paragraph 9 of Taxation Ruling TR 2004/4 Deductions for interest incurred prior to the commencement of or following the cessation of relevant income-earning activities. Paragraph 9 of TR 2004/4 provides that interest incurred in a period prior to the derivation of relevant assessable income will be 'incurred in gaining or producing the assessable income in the following circumstances: • the interest is not incurred 'too soon', is not preliminary to the income earning activities, and is not a prelude to those activities,' • the interest is not private or domestic, • the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost, • the interest is incurred with one end in view, the gaining or producing of assessable income; and • continuing efforts are undertaken in pursuit of that end. | Detailed Reasoning - Application to your circumstances: You are entitled to an apportioned deduction for the loan interest incurred in relation to the construction of the dwelling prior to the dwelling being lawfully available for rent. Interest expenses incurred on the total loan monies borrowed (land and construction costs) can only be deducted from the date the Property is lawfully able to be occupied and is available for lease. For more information on interest deductions relating to rental properties, search QC 101711 at ato.gov.au.