Interest on the land is denied. Interest on the construction is not. If the bank has written one loan, someone has to do the sums.

With negative gearing now quarantined for established dwellings, new house and land has become the sensible play for investors. The numbers stack up. But there is a trap in the first eighteen months that costs people real money, and it comes down to how the bank set up the finance.

The land is switched off

The vacant land rules deny deductions for the costs of holding land where there is no completed, usable structure on it. Interest on the money you borrowed to buy the block, council rates, land tax all switched off. Starting the build does not turn them back on. They stay off until the house can lawfully be occupied and is rented or genuinely available for rent.

Construction Is Different

The Tax Office accepts that borrowing costs associated with constructing the house are not costs of holding the land. So the interest on your construction drawdowns is deductible while the house is going up, subject to the ordinary rules about borrowing for an income-producing purpose.

That is a meaningful deduction during a period when you have no rent coming in.

One loan, one problem

The difficulty is that most lenders write a single facility covering both the land and the progress payments. When that happens, the interest has to be apportioned between the land component and the construction component on a fair and reasonable basis, worked out drawdown by drawdown as the build progresses. It can be done, and we do it, but it takes time, it relies on complete loan statements, and it is the sort of calculation that invites questions.

Two separate facilities remove the problem entirely. A land loan and a construction loan give you a clean, self-evident split with nothing to argue about.

The denied interest is not wasted

Interest denied on the land can generally be added to the property’s cost base and reduce a future capital gain, though it only works against a gain and cannot be used to create a loss.

One more point worth raising with us early: these rules do not apply to land held by companies, or where the land is used in carrying on a business. Ownership structure changes the answer before the finance does.

Talk to us before the loan documents are signed. Two facilities instead of one costs you nothing at the application stage, and it is expensive to fix afterwards.

t: +61 7 3177 4120
e: advisors@hksrussell.com

Posted on October 12, 2026 by Charisse Russell - Articles