Fire Damaged Buildings: Tax Breaks for Investors

Background:

A fire in August 2023 caused significant damage to a building in Surry Hills, which had a ripple effect, impacting adjacent properties, including an investment property owned by our client, Mioko. The damage has left Mioko’s apartment untenable and, consequently, unrentable. She is now grappling with the holding costs of her investment property, which have been accumulating since the unfortunate event. As December 2023 approaches, the prospect of renting out the property in the next six months remains bleak.

Challenges:

The primary concern for Mioko is the unpredictability of the vacancy period of her investment property. Without rental income and in the absence of rental loss insurance payments, she faces mounting financial pressure. Mioko sought our expertise regarding the interest deduction for her investment loan, particularly in light of the tax stipulations in section 26-102, which could potentially restrict her from claiming deductions for expenses associated with her investment property‘s holding costs.

Findings and Solutions :

Upon consultation, our tax advisor has offered guidance, confirming that interest deductions for investment property loans and other holding costs can still be claimed if the conditions for the ‘exceptional circumstances exemption’ are met.

Fire Damaged Building

The exemption may apply where an exceptional circumstance outside your control occurs, that results in the substantial and permanent structure no longer being on your land or the structure being disregarded.

Exceptional circumstances include:

  • a natural disaster
  • a major building fires.
  • substantial building defects (where the structure can no longer be lawfully occupied or used).

For the exemption to be viable:

  • The investment property must have had a substantial and permanent structure before the incident.
  • The property must have been legally occupied or listed for rent before the exceptional event.

Mioko’s situation aligns with these requirements as her apartment was legally rented out before the fire. Currently, she cannot lawfully rent the property until it receives the necessary clearances to confirm its habitability.

We are aware of the three-year time frame associated with this exemption and are ready to support Mioko in seeking an extension if the rehabilitation of her investment property is delayed due to administrative, legal, or financial complications arising from the fire. council or local government approval, legal disputes, builders or strata went into liquidation etc.

Source: ATO/Exceptional Circumstances Exemption