1. If the property is a rental property (earning rental income or properly advertised for rental) the interest must be deducted against the rental income. The CGT legislation has 'anti-overlap' provisions which prevent you including in the CGT cost base (section 110-25) what can be deducted under the ordinary income provisions (section 8-1).
2. You would be worse of, anyway, including the interest in your CGT cost base because this reduces your CGT profit and therefore reduces your CGT discount.
3. However, if your property is not earning rental income or on the market for rental then you cannot deduct the interest expense and therefore must include it in your CGT cost base.
INCOME TAX ASSESSMENT ACT 1997 - SECT 110.45
Assets acquired after 7.30 pm on 13 May 1997
(1B) Expenditure does not form part of the second or third element of the cost base to the extent that you have deducted or can deduct it.
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s110.45.html
INCOME TAX ASSESSMENT ACT 1997 - SECT 110.25
(4) The third element is the costs of owning the * CGT asset you incurred (but only if you * acquired the asset after 20 August 1991). These costs include:
(a) interest on money you borrowed to acquire the asset;
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s110.25.html
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