If you sell or dispose of a residential property you may be able to claim the amount of interest previously disallowed by the interest limitation rules.
Taxable under the bright-line test
If you sell or dispose of a residential property and the sale is taxable under the bright-line test, you can add the amount of the interest previously disallowed by the interest limitation rules to the cost of the property to reduce the taxable gain.
If this results in a loss, it can only be deducted against other taxable gains on other land sales. It cannot be used to offset income from other sources like salaries and wages. Any excess loss must be carried forward and deducted against other land sale gains in later income years.
Taxable for other reasons
If the sale of the residential property is taxable under 1 of the other land sale rules, the previously disallowed interest is treated as part of the cost of the property in the year it is sold.
If the disposal is not taxable
If the disposal is not taxable, you cannot claim the interest previously disallowed under the interest limitation rules.