Second dwelling deductibility?

Our Experts Answer:

You are right in that interest incurred on the further borrowing you undertake to build the rental dwelling will be deductible. Your question seems to be whether or not any of the interest on the pre-existing borrowing could be claimed as deductible. As you have accurately pointed out, this existing borrowing relates in part to the land that you are going to build the new dwelling on and also relates in part to the land that your existing home sits on.

This means arguably a proportion of the existing borrowing relates to the rental activity, as it relates to your acquisition of the land on which the rental dwelling is to be built. There is no statutory formula for working out what proportion of interest incurred on such borrowing would be deductible. Typically, one would start by looking at the relative areas of land and you could then use that as a basis for apportioning the interest on the existing borrowing and claiming a further deduction for part of that.