Buy a block of vacant land in Australia and two different tax rules start watching you from opposite directions. Section 26-102 says you generally cannot claim a tax deduction for holding it — no interest, no council rates, no land tax. But capital gains tax says every dollar of profit on sale is taxable. The trap everyone falls into is assuming the denied deductions are simply lost. They aren’t: the denied holding costs are added to the land’s cost base and shrink the CGT bill when you sell. How much that safety net is actually worth in dollars — and where it quietly fails — is what this guide works through.
Quick answer: how is vacant land taxed in 2026-27?
Vacant land is a CGT asset. Sell it at a profit and you pay CGT on the gain, with the 50% discount still available in 2026-27 to resident individuals and trusts who have held it for more than 12 months. While you hold it, section 26-102 of the Income Tax Assessment Act 1997 denies deductions for holding costs — interest on the land loan, council rates, land tax, maintenance — for individuals, family trusts and SMSFs, for expenses incurred since 1 July 2019. Companies, non-SMSF super funds and managed investment trusts are excluded from the denial and can still claim. Denied costs that would otherwise be cost-base elements are capitalised instead — into the third element (costs of owning) the asset — and reduce the eventual capital gain.
The one legitimate escape from CGT entirely is building your home on it: s118-150 lets you treat the land as your main residence for up to 4 years before you move in, provided you actually build, move in as soon as practicable, and live there for at least 3 months. Intention alone is not enough.
What s26-102 does to your deductions
Before 1 July 2019, holding costs were broadly deductible under the general rules where the land was held for an income-producing purpose. Section 26-102 ended that for expenses incurred on or after 1 July 2019. The ATO treats “holding costs” as: ongoing borrowing costs including interest on money borrowed to acquire the land, land tax, council rates, and maintenance.
Fine print from Taxation Ruling TR 2023/3 and the ATO’s guidance:
- The land-loan interest is caught; the construction-loan interest is not. Interest on borrowings to construct a structure is not a cost of holding land. Fund the purchase and the build with two separate loans and s26-102 kills the deduction on the land-loan interest but leaves the construction-loan interest to the normal deduction rules.
- It catches individuals, partnerships with an individual partner, discretionary trusts, unit trusts with individual unitholders, and SMSFs. The excluded entities — corporate tax entities, super funds other than SMSFs, managed investment trusts and public unit trusts — are untouched.
- It can also bite land you are developing. Land with a house under construction (or substantially renovated) while you hold it is still treated as vacant until the premises are lawfully able to be occupied and rented or available for rent.
- It ends when the land stops being vacant. Once a substantial and permanent structure is in use or available for use — a rental home with an occupancy certificate, genuinely listed for lease — normal deduction rules resume (apportion expenses that straddle the date).
| Holding cost | Pre-1 Jul 2019 (income purpose) | Now: individuals, family trusts, SMSFs | Now: companies, non-SMSF super, MITs | Goes to cost base? |
|---|---|---|---|---|
| Interest on the land loan | Generally deductible | Denied | Deductible | Yes — third element |
| Council rates | Generally deductible | Denied | Deductible | Yes — third element |
| Land tax | Generally deductible | Denied | Deductible | Yes — third element |
| Maintenance (mowing, fencing upkeep) | Generally deductible | Denied | Deductible | Yes — third element |
| Interest on a separate construction loan | Deductible under general rules | Deductible under general rules | Deductible under general rules | n/a (not a holding cost) |
Cost-base capitalisation: the safety net explained
Denied does not mean destroyed. Under CGT law, holding costs that are not deductible can be included in the cost base of the land — the ATO says so explicitly on its vacant-land page — which reduces the capital gain when you sell. Mechanically, they go into the third element of the cost base: costs of owning the asset.
Two caveats most articles never mention:
Caveat 1 — the safety net only works if there is a gain. Under s100-45(7), third-element costs can only be included in the cost base if you actually make a capital gain. If you sell the land at a loss (or merely break even against the other elements), the denied holding costs add nothing and cannot be used to inflate the capital loss. RSM and other technical sources confirm this; it matters a lot in flat markets.
Caveat 2 — the safety net is worth roughly half a deduction. Because a deduction saves tax at your full marginal rate, while a cost-base addition saves tax only after the gain is halved by the 50% CGT discount. The next worked example puts dollars on this.
Worked example 1: the $66,900 of denied deductions, in dollars
Marcus buys vacant land on 15 February 2023 for $400,000 (stamp duty $14,000, legal fees $2,000), borrowing $320,000 at about 5.625%. Annual holding costs: interest $18,000, council rates $2,500, land tax $1,800 — $22,300 a year. He sells three years later, on 20 March 2027, for $620,000 (agent commission $12,400, legal $2,000).
Denied deductions: $22,300 × 3 = $66,900 — not a cent deductible under s26-102. All of it capitalises into the third element of the cost base.
CGT calculation:
| Item | Calculation | Amount |
|---|---|---|
| Sale price | $620,000 | |
| Cost base (1st + 2nd elements: price, duty, legals, selling costs) | $400,000 + $14,000 + $2,000 + $14,400 | $430,400 |
| Cost base (3rd element: denied holding costs) | $22,300 × 3 | $66,900 |
| Total cost base | $497,300 | |
| Capital gain | $620,000 − $497,300 | $122,700 |
| Discounted gain (50%, held >12 months) | $122,700 × 50% | $61,350 |
Without the cost-base safety net, the gain would have been $189,600 and the discounted gain $94,800. The $66,900 of denied costs saved Marcus tax on $33,450 of discounted gain. Compare the two worlds:
| Your marginal rate in 2026-27 | If the $66,900 had been deductible | As cost-base additions (via 50% discount) | Extra tax the denial costs you |
|---|---|---|---|
| 30% (+ 2% Medicare) | $21,408 saved | $10,704 saved | $10,704 |
| 37% (+ 2% Medicare) | $26,091 saved | $13,046 saved | $13,045 |
| 47% (+ 2% Medicare) | $31,443 saved | $15,722 saved | $15,721 |
The rule of thumb: a denied holding cost is worth roughly half what a deduction was worth — and higher-bracket taxpayers lose the most in absolute dollars. Model your own position with our CGT calculator and income tax calculator.
Worked example 2: the 4-year build-and-live-in-it rule (s118-150), with real dates
Priya buys a vacant block on 1 February 2023 for $450,000 (cash, no loan), intending to build her home. Development approval comes through in August 2023. The builder starts in March 2024, the house is finished in January 2025, and the occupancy certificate is issued on 10 March 2025. Priya moves in on 15 March 2025 — five days later, clearly “as soon as practicable”. She lives there for two and a half years and sells on 1 July 2027 for $880,000.
Section 118-150 lets her treat the land as her main residence for the whole period back to acquisition if four conditions are met: the dwelling is built and she moves in within 4 years of acquiring the land (1 Feb 2023 to 15 Mar 2025 is about two years), she moves in as soon as practicable after completion, the home is her main residence for at least 3 months (two and a half years), and she does not treat any other dwelling as her main residence for the same period.
All four hold, so the roughly $410,000 gain is fully exempt. Note that the land was still “vacant” for CGT purposes during construction — had Priya carried a land loan, that interest would not have been deductible for those years either.
Now the trap: if Priya had sold the bare block in 2024 before building, no exemption at all — ATO private rulings are blunt that a mere intention to build is insufficient, even with a development approval in hand. And the exemption caps at four years before move-in: if delays push the move past the 4-year mark, you can apply for a private ruling asking the Commissioner to extend it, but you must show genuine steps to rebuild — land listed for sale kills the application. (The ATO’s TD 2000/16 sets out the full mechanics; see our main residence exemption guide.)
The traps: SMSF, adjacent land, subdivision and the 2027 reform
The SMSF trap
Many investors assume their SMSF can keep claiming vacant-land interest because “super funds are excluded”. Wrong way around: s26-102 excludes super funds other than SMSFs. An SMSF holding vacant land is squarely caught — interest, rates and land tax denied — and the denied costs still flow into the cost base. Worse, an SMSF only gets the 33.33% CGT discount, not 50%, so the safety net is worth even less inside an SMSF.
The adjacent-land trap (the 2-hectare rule)
Vacant land adjacent to your home can be exempt as part of the main residence exemption — up to 2 hectares total, used mainly for private or domestic purposes. The tripwire: the adjacent land is only exempt when sold with the dwelling. Subdivide off the paddock and sell it separately and its gain is fully taxable (exceptions: accidental destruction of the dwelling, or compulsory acquisition). This catches retirees subdividing the back block.
The company “loophole” isn’t free
Yes — a company is a corporate tax entity and s26-102 does not touch it, so a company can deduct vacant-land holding costs. But companies get no 50% CGT discount, and profits distributed to you are taxed again as dividends. For a block you plan to sell at a big gain in a few years, the discounted individual gain usually beats the deductible-but-undiscounted company path. Compare both with real numbers first.
Subdivision: get GST advice before contracts
Subdividing vacant land doesn’t trigger CGT by itself — the tax event happens when you sell each block. But if the activity is an enterprise with turnover over $75,000, GST can apply to the sale of vacant residential lots (the margin scheme can reduce it, but both parties must agree in writing). Get GST advice before you sign contracts, not after — the full treatment is in our subdivided land CGT guide.
The 1 July 2027 reform — future law, not current law
The Government’s announced Budget reform changes this from 1 July 2027: for gains accrued after 30 June 2027, the 50% discount is replaced by cost-base indexation plus a 30% minimum tax rate on the real gain (income-support recipients are exempt from the minimum rate). It is legislated for 2027-28 onwards, not for the year you are lodging now.
One nuance for landbankers in the announced design: indexation applies to the purchase cost, but the ongoing third-element ownership costs — your denied interest, rates and land tax — are not indexed. So the cost-base safety net, already worth only half a deduction, does comparatively worse for anyone still holding past 30 June 2027. More on the discount in our CGT discount guide.
Common mistakes
- Claiming land-loan interest “because I intend to build a rental.” Intention changes nothing. Until a substantial and permanent structure is lawfully occupiable and available for rent, s26-102 denies it. The ATO’s private rulings have rejected this exact argument repeatedly.
- Assuming the SMSF is an excluded entity. It is not — only non-SMSF super funds are. One of the most repeated mistakes in accountant blogs’ comment sections.
- Treating a shed, garage or letterbox as a “structure”. The ATO requires a substantial and permanent structure with an independent purpose — a residential shed, pipes, powerlines and landscaping do not count.
- Throwing away records of denied costs. Every rates notice, land tax assessment and loan statement from the vacant years is third-element cost base. No records, no reduction. Keep them for five years after you sell.
- Selling the back block separately and expecting the main residence exemption. Adjacent land is only exempt when sold with the dwelling — subdivide and sell alone, and it is fully taxable.
- Thinking pre-2019 purchase date protects post-2019 expenses. The denial applies to expenses incurred on or after 1 July 2019, regardless of when you bought the land.
Tips
- Run two separate loans. One for the land, one for the construction. The construction-loan interest escapes s26-102 under the general deduction rules; mixing them into one facility makes apportionment painful.
- Diary the two dates that end the denial: the day the home is lawfully able to be occupied (occupancy certificate) and the day it is first listed for rent. From then, normal deductions apply.
- Keep a holding-cost file per year. Interest, rates, land tax, maintenance — your third-element cost base. A spreadsheet plus scanned statements is enough.
- Check who holds the land. Individual, family trust or SMSF? s26-102 applies. Company or large super fund? It doesn’t — but weigh the lost CGT discount before choosing.
- If fire, flood or major defects destroy a structure, act inside 3 years. The exceptional-circumstances exception lets you keep claiming holding costs for up to 3 years from the event; beyond that you need a private ruling.
- Model the 2027 boundary. If a sale might fall after 30 June 2027, get advice on the indexation design now — the discount-only-covers-gains-to-30-June-2027 split can change the answer. Our cost base guide covers what feeds into each element.
Frequently asked questions
Can I claim interest on a vacant-land loan in 2026-27?
For most individuals, family trusts and SMSFs: no. Section 26-102 has denied holding-cost deductions since 1 July 2019 unless you are an excluded entity (company, non-SMSF super fund, MIT), use the land in a business, lease it at arm’s length for someone else’s business, or are a primary producer. Interest on a separate construction loan is assessed under the normal rules, not s26-102.
If I can’t deduct the holding costs, are they just lost?
Usually not. They go into the third element of the land’s cost base and reduce the capital gain — but only if there is a gain. Sell at a loss and they add nothing. And the saving is roughly half what a deduction was worth, because the gain gets the 50% discount.
I bought land to build my home — is it exempt from day one?
Only via s118-150, and only if you actually build: the dwelling must be constructed, you must move in as soon as practicable and within 4 years of acquiring the land, live there at least 3 months, and not claim another dwelling as your main residence for the period. Intention to build is not enough — the ATO has ruled against taxpayers who sold the bare land with a DA in hand.
Can my SMSF buy vacant land and claim the interest?
No. SMSFs are not excluded entities under s26-102, so holding costs are denied. The SMSF also gets a smaller CGT discount (33.33%) than an individual, which weakens the cost-base safety net. Get specialist advice before settlement.
Can I avoid s26-102 by holding the land in a company?
Technically the company can deduct the holding costs, but it gets no 50% CGT discount and pays tax on the full nominal gain. For most landbanking horizons the discounted individual gain wins despite the denied deductions.
How does the 1 July 2027 CGT reform affect vacant land?
In 2026-27 nothing changes: the 50% discount still applies for gains accrued to 30 June 2027. From 1 July 2027 the announced reform replaces the discount (for later-accruing gains) with cost-base indexation plus a 30% minimum tax rate on the real gain. If you plan to hold across that boundary, get advice before 30 June 2027.
The bottom line
Vacant land is taxed on the sale and untouchable on the deductions — that is the s26-102 reality since 2019. But the tax system gives you a partial refund at sale through the cost base: roughly half the value of the deductions you lost — about $10,700 in extra tax on three years of $22,300-a-year holding costs for a 30%-bracket holder, and about $15,700 at the top bracket. Keep every statement, split the land and construction loans, and if you are building your own home, hit the four s118-150 conditions with real dates — that 4-year window is the only full exemption on the table. Run the numbers on our CGT calculator before you list the block.
