Loan interest for rental property

[cc12389]

I used my HELOC to purchase a rental property in 2022. The property  took 2 years to complete the build - 2024. Can I claim there interest from that loan as an investment expense for those two years or does it need to be for each calendar year, even though it wasn't built yet.

Thank You

[DavidD66]

The interest you paid both before and after the construction period can be deducted as a business expense in the year you paid ( or accrued) it.  The interest you pay on the loan during the construction period is not deductible.  Instead, this cost must be added to the basis of your property and depreciated over 27.5 years.

[cc12389]

Thanks for the reply! 

I'm not too sure what you mean when you mention the cost must be added to the basis of the property and depreciated over 27.5 years.

It's not simply reported as an investment expense under carrying costs? 

[PatriciaV]

You have the option to capitalize carrying costs (including interest) as part of the basis of the property. Otherwise, the costs are deductible in the year they are paid.

For more info, see How do I make an election in Section 266 to capitalize the taxes paid to the basis of vacant propert...

[cc12389]

So should the interest accured to fund the rental property be allocated as a CCA? Or just expense as an investment expenses as they relate to carring costs?

[RobertB4444]

No.  Your basis in the rental property is what you paid for it.  When you start to rent it you will be able to deduct a portion of what you paid for it each year going forward.  So the costs that you had for the two years leading up to turning it into a rental property are just added in as part of what you paid for the place.  The same with any other costs prior to it becoming a rental.

Once it is a rental property and is in active use then you will be able to deduct any mortgage interest expense from your rental income each year.

@cc12389