Deductible - or not

Our Experts Answer:

This is an excellent question. The first point is that if the property is owned in a company that is not an LTC (i.e. what we would describe as an “ordinary” company), the interest is deductible without any further consideration required. Ordinary companies are entitled to claim interest incurred as an automatic statutory deduction. Where the issue gets more contentious is if the property is owned personally, in a trust or an LTC. If one of these ownership structures is employed, then there are two schools of thought.

On the one hand, the fact that the property has not been available for the production of income means that the interest is not deductible. This is likely how the IRD would view the question. The alternative argument is that a deduction is available if it is incurred in order to produce income, with there not being a requirement that the income be produced in the year in question. In other words, expenditure can be deductible if incurred with a view to income being produced in the future. Under this argument the interest is deductible.

My feeling is that the second argument is the better position and obviously one that favours the taxpayer. There may be other factors at play here that could be relevant, e.g. if you own numerous properties, you may be regarded as carrying on a business which could make for a stronger case of the interest being deductible. Also, it will likely be crucial that you retain the property and derive income in the future. If you are to argue that the interest has been incurred with a view to producing income from the property in the future, that argument only works if you actually do retain the property and rent it rather than selling it upon the repairs being completed.