Buying a block of land to build on later is a common first step for investors. What surprises many buyers is that the interest on the land loan usually cannot be claimed while the block is empty, even when the plan is to build a rental.
This guide explains the vacant land rules in section 26-102 of the Income Tax Assessment Act 1997 for the 2025-26 and 2026-27 income years: what is limited, who is excluded, the exceptions, how the construction period works and what happens to costs you cannot claim. Every rule was checked against the ATO vacant land deductions page and the ATO compendium to ruling TR 2023/3.
It is for individuals, family trusts and SMSF trustees holding land. If you already own a completed rental, our guide to rental property deductions covers the expenses you can claim.
Key takeaways
- From 1 July 2019, holding costs for vacant land are generally not deductible, including interest, land tax and council rates.
- Companies, widely held super funds and managed investment trusts are excluded; SMSFs are not.
- Land stops being vacant once residential premises are lawfully able to be occupied and leased or available for lease.
- Interest on borrowings to construct a building is not a holding cost under the vacant land rule.
- Non-deductible holding costs may be added to the cost base.
Vacant land interest rules at a glance
| Rule | What the ATO says |
|---|---|
| Start date | Applies to holding costs from 1 July 2019 |
| Costs limited | Interest on money borrowed to buy the land, land tax, council rates, maintenance |
| Who is excluded | Corporate tax entities, super funds other than SMSFs, managed investment trusts, public unit trusts |
| Main exceptions | Business use, arm’s length lease to a business, primary production, substantial and permanent structure |
| Exceptional events | Up to 3 years after a natural disaster, major fire or similar event |
| Costs you cannot claim | May be included in the cost base |
Source: ATO deductions for vacant land, ATO compendium to TR 2023/3, checked 7 October 2026.
What changed on 1 July 2019?
Before 1 July 2019, an investor who bought land intending to build a rental could often claim the interest from the start. Section 26-102 changed that. The ATO land and vacant land pages list the holding costs now limited: ongoing borrowing costs, including interest on money borrowed to acquire the land, land taxes, council rates and maintenance costs.
The rule applies to costs incurred from 1 July 2019 regardless of when you bought the land.
Who is not affected by the vacant land rule?
The limit does not apply to these excluded entities:
- Corporate tax entities.
- Superannuation funds, other than self-managed super funds.
- Managed investment trusts.
- Public unit trusts.
- Unit trusts or partnerships whose members are all excluded entities.
If you hold land through a self-managed super fund or a family discretionary trust, the rule applies just as it does to an individual.
What counts as vacant land?
Land is vacant unless it has a substantial and permanent structure. The ATO says the structure must be significant in size or value and fixed and enduring, not built for a temporary purpose. A small shed or fence will not usually qualify.
For residential premises there is an extra test: the building must be lawfully able to be occupied and must be leased, hired or licensed, or available for lease, hire or licence. A house under construction does not meet this.
What are the exceptions?
| Situation | Can holding costs be claimed? |
|---|---|
| Land banking with no use | No |
| Building your own home | No, it is private |
| Building a rental, before occupancy | Land loan interest: no. Construction loan interest: not caught by the vacant land rule |
| Rental home lawfully occupiable and available for lease | Yes, from that date |
| Used in a business carried on by you, your spouse, your child under 18, an affiliate or a connected entity | Yes |
| Leased at arm’s length to another entity for its business, no residential premises | Yes |
| Used in a primary production business | Yes |
| Owned by a company or managed investment trust | Rule does not apply |
There is also an exceptional circumstances exception. If a structure becomes unusable because of a natural disaster, major building fire or substantial building defect, deductions can continue for up to 3 years from that event.
Can you claim interest during construction?
This is where many older articles get it wrong. The ATO compendium to TR 2023/3 says the costs of constructing a structure, and interest to the extent it is associated with construction, are not costs of holding land for section 26-102. In the ATO example, an investor with a separate construction loan can claim that interest, but not the interest on the loan used to buy the land.
The interest on the land purchase loan becomes deductible from the day the new rental is lawfully able to be occupied and is leased or available for lease. Keeping the land loan and construction loan separate makes this much easier to prove.
What happens to the costs you cannot claim?
According to the ATO, holding costs that are not deductible may be included in the cost base of the land. That reduces the capital gain when you sell. Our guide to reducing CGT on property explains cost base records, and our capital gains tax services page shows how we help.
Land tax is one of those holding costs. For how it differs from rates, read land tax vs council rates.
Worked example: building a rental in 2025-26
Mei bought a block in 2024 with a $400,000 land loan. In 2025-26 the land loan interest is $24,000 and council rates are $2,000. She takes a separate construction loan to build a rental house. The certificate of occupancy issues on 30 November 2025 and the house is advertised for rent that day.
Days available for lease in 2025-26: 30 November 2025 to 30 June 2026 = 213 days.
Deductible land loan interest: $24,000 x 213 / 365 = $14,005. Non-deductible: $24,000 – $14,005 = $9,995.
Deductible rates: $2,000 x 213 / 365 = $1,167. Non-deductible: $2,000 – $1,167 = $833.
The $9,995 + $833 = $10,828 of non-deductible holding costs is recorded for the cost base. Interest on the construction loan is not limited by the vacant land rule and is assessed under the general deduction rules.
Rule of thumb: Use separate loans for the land and the build, and record the exact date the home could lawfully be occupied and was first offered for rent.
Common mistakes with land loan interest
- Claiming land interest from settlement: it is generally not deductible until the premises are occupiable and available for lease.
- Assuming an SMSF is exempt: only super funds other than SMSFs are excluded entities.
- Treating a shed as a structure: it must be substantial and permanent.
- Mixing loans: one combined facility makes it hard to separate land interest from construction interest.
- Throwing away records: non-deductible costs may go into the cost base, so keep every statement.
If you are weighing up the cash flow of a new build, our negative gearing guide and tax planning service can help.
FAQ about claiming interest on land loans
Can I claim interest on a loan for vacant land in 2026?
For most individuals and family trusts, no. Since 1 July 2019, interest on money borrowed to buy vacant land is not deductible unless an exception applies, such as using the land in a business, leasing it at arm’s length to a business, primary production, or the land having a substantial and permanent structure that is lawfully occupiable and leased or available for lease.
Is interest during construction of a rental deductible?
Interest on the loan to buy the land stays non-deductible until the new home can lawfully be occupied and is leased or available for lease. The ATO says interest on borrowings to construct a structure is not a cost of holding land, so a separate construction loan is not caught by the vacant land rule, although the general deduction rules still apply.
Do the vacant land rules apply to my SMSF?
Yes. The excluded entities are corporate tax entities, superannuation funds other than self-managed super funds, managed investment trusts, public unit trusts and unit trusts or partnerships made up only of those entities. An SMSF is not on that list, so it is limited in the same way as an individual.
What happens to the interest and rates I cannot deduct?
They are not lost. The ATO says holding costs that are not deductible may be included in the cost base of the land. That reduces the capital gain, or increases the capital loss, when you later sell. Keep loan statements, rates notices and land tax assessments for the whole ownership period.
Does a shed or fence stop land being vacant?
Not usually. Land is only treated as not vacant if it has a substantial and permanent structure, meaning one that is significant in size or value and fixed and enduring rather than temporary. For residential premises, the building must also be lawfully able to be occupied and be leased or available for lease.
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Talk to a registered tax agent
The vacant land rules turn on dates, loan structure and who owns the land. Nanak Accountants can review your loans, apportion the interest correctly and keep your cost base records in order. Talk to our property accountants, call 1300 626 258 or contact Nanak Accountants.
This article is general information only and is not personal tax or legal advice. Figures and rules were checked against the ATO vacant land deductions pages and the ATO compendium to TR 2023/3 on 7 October 2026. Rates and thresholds change, so confirm the current position before acting.
