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Deducting holding costs for privately used land

Deducting holding costs for privately used land

Inland Revenue released a consultation document in October 2019 regarding the deductibility of holding costs for private uses. Holding costs are expenses including interest, insurance, repairs and maintenance.

The document proposes three options for the treatment of holding costs for periods when land is used privately:

  • Apportion the holding costs between private use and the taxable gain on sale, where only costs apportioned to the taxable gain on sale will be deducted.
  • Allow all deductions on holding costs, so that full deductions on holding costs can be claimed despite any private use. Deductibility will then be determined by whether the land has any taxable use, instead of whether the land is ever privately used.
  • Deny all deductions for holding costs for periods where land is used privately, regardless of whether there are still costs related to earning taxable income during private use periods. This is the Inland Revenue’s preferred option.

Aside from individual owners, the proposal to deny holding cost deductions for private use would also apply to other entities such as partnerships, trusts and look through-companies.

The proposal also considers the treatment of costs on vacancy periods, concluding that whether or not the land is used privately or for income, the tax treatment will depend on how the land is just for the majority of the time. If the land is always vacant, deductions of holding costs will only be available if the land was acquired with the purpose of earning income. Otherwise, the land is considered to be used for private purposes.

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