Off-the-plan interest deduction
Question from warren updated on 23rd March 2020:
If I borrow to fund my deposit for an off-the-plan apartment, is the interest deductible now - even though no rental income will be derived until the building is completed in two years’ time?
Our expert Matthew Gilligan responded:
You would think that a simple question like this would have a simple answer. However, that is not the case. If you borrow the money via a company that is not an LTC, then there is a simple answer. The interest is deductible. “Ordinary” companies have automatic entitlement to claim interest regardless.
If you borrow the money personally or via an LTC, there are two schools of thought. The IRD’s view is most likely that the interest is not deductible because there is not a nexus with current income. The alternative view is that the interest is deductible because there is a nexus with expected income in the future via the eventual rent. It is worth noting that perhaps there may be other options within your structure that offer more assurance in terms of the deductibility of interest.
Also worth noting is the impact of the new ring-fencing rules which water down the benefit of claiming interest in relation to a residential rental property. I suggest you get advice as there may be a way to structure the borrowing so that not only is there not a dispute with the IRD over deductibility, but you maximise benefit from the deductions.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.