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Edited version of private ruling
Authorisation Number: 1011701815186
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Ruling
Subject: Rental property outgoings
Question
Are you entitled to claim interest on your investment loan and holding costs for rates, water charges and insurance premiums in relation to your damaged rental property while it is being rebuilt?
Answer:
Yes.
Relevant facts
You have rented out one or two rooms of your principal place of residence for several years.
You rented the rooms on a commercial basis at a market rate of rent.
Your last tenant left, and you were renovating the property while it was vacant with a view to leasing the entire property at the end of June or early July.
Before it could be renovated and leased, the property was entered by unknown persons and considerable damage including fire damage was done to the property.
You are currently restoring the property and you intend to rent it as soon as repairs are completed.
Interest and other costs will be incurred during the time the property is being repaired.
Reasons for decision
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.
For interest expenses and holding costs such as rates, water charges and insurance premiums to be deductible the property must be held for income producing purposes.
An existing property will be considered to be held for income-producing purposes if the property is being rented out, available for rent, or intended to be rented when repair activities are complete.
In your case repairs and maintenance had to be conducted on your rental property due to burglary and arson damage. Although the property is vacant during the period it is being repaired, your intention is to re-rent the whole property once the repairs are completed.
During the period this property is being repaired and remained vacant you incurred expenses such as interest, rates, water charges and insurance premiums. As the property is considered to be held for income producing purposes during this time, the expenses are considered to be incurred in gaining your assessable income.
Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the interest, rates, water charges and insurance expenses you incur in relation to the rental property for the period it was vacant and undergoing repair.