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Interest deductions on loans for vacant land
Before July 2019, loans on vacant land were an incredibly viable way of entering the property market. The interest was considered deductible, so overall, the cost of holding vacant land was less. However, in July 2019 a new regulation meant that this wasn't the case anymore. Here's how the law has changed, and how it might force you to make some changes.
You can't claim interest until the structure is complete
Previously, you may have been able to hold on to your plot of vacant land, deducting any interest gained on the loan as a tax deductible expense. Now that the legislation has changed, that interest is only deductible once something has been built on the land. Holding on to vacant land with the intention of keeping it vacant is no longer a feasible solution, as it's become more expensive to hold the land.
In order to avoid the consequences of the law change, you'll need to get a structure down on the land faster. Not only does this mean that you'll be able to make the interest deductible sooner, but by having something built you can also have the building bringing in revenue sooner (i.e., by way of rental income).
When the rules won’t apply to you
It’s important to note that the deductibility of holding costs (i.e., interest expense) on vacant land will continue to be available in the following circumstances — there are other circumstances as well, but these are the main ones:
- The land is held by a corporate tax entity.
- The land is used in carrying on a business by you and/or your affiliates.
- The land is leased by you to another entity, who is carrying on a primary production business.
This applies for existing properties too
If you own vacant land and have continued deducting interest from any loans you might have used to get it, the July change means that deductible interest on loans taken out before is now non-deductible. This means that if you purchased vacant land some time ago and it is still vacant with nothing built on it, your interest will be non-deductible until there is something there.
In these cases, building something on the land will lower your tax burden, and get the revenue flowing sooner. There is an initial cost of getting a building started, but in the long run, it’s the best way to profit.
Need more advice?
If you need advice on the changes to vacant land loan interest, Ascent Accountants have the best tax planning Perth has to offer. Our expert team has years of experience and can guide you on an ideal way forward, either when dealing with this change in the law or any changes that could come in the future. Please get in touch — we’d love to help.
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