Good day,
I have a question about whether interest paid on a home loan can be included in the cost base of a property under the third element.
Situation:
- I purchased a property using a mortgage loan
- I used this property as my Principal Place of Residence (PPOR) for 7 years
- During those 7 years, I paid interest on the mortgage loan, which was non-deductible (as it was for my own home)
- After 7 years, the property was converted to an investment property
- Since conversion, the interest has been deductible as it's now an income-producing expense
- The property was sold after being an investment for 14 years.
Question: Can I include the interest I paid during the 7-year PPOR period in the cost base of the property under the third element?
My understanding based on ATO guidance:
The ATO states that third element costs include "non-deductible interest on borrowings to finance a loan used to acquire a CGT asset" (Capital Gains Tax Guide 2021 - What is the cost base).
The interest I paid during the PPOR period was:
- Interest on a loan used to acquire the CGT asset (the property)
- Non-deductible (couldn't claim it as a tax deduction while it was my PPOR)
This appears to meet the criteria for inclusion in the third element cost base.
However, I'm uncertain because:
- The interest relates to the period when the property was my PPOR, not when it was income-producing
- I haven't found explicit ATO guidance addressing whether PPOR interest qualifies for the third element.
Could someone please clarify whether interest paid during the PPOR period can be included in the cost base under these circumstances? I would especially appreciate links to any ATO resources (rulings, guidelines or other published materials) that confirm your point of view.
Thank you.
P.S. Comments from the experts such as @Bruce4Tax and @Taxduck are extremely valued.
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