Off-the-plan interest deduction

Our Experts Answer:

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.