• Rental properties - claiming interest expenses

    The types of interest expenses you can claim as income tax deductions.

    What can you claim?

    You can claim the interest charged on the loan you used to:

    • purchase a rental property
    • purchase a depreciating asset for the rental property (for example, to purchase an air conditioner for the rental property)
    • make repairs to the rental property (for example, roof repairs due to storm damage)
    • finance renovations on the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property), and
    • purchase land on which to build a rental property.

    You can also claim interest you have pre-paid up to 12 months in advance.

    Further Information

    For more information about claiming pre-paid expenses, refer to Deductions for prepaid expenses.

    End of further information

    What are you unable to claim?

    You cannot claim interest:

    • you incur after you start using the rental property for private purposes
    • on the portion of the loan you use for private purposes (for example, money you use to purchase a new car or invest in a super fund)
    • on a loan you used to buy a new home if you do not use the new home to produce income.

    Example: Claiming all interest incurred

    Kosta and Jenny take out an investment loan for $350,000 to purchase an apartment they hold as joint tenants.

    They rent out the property for the whole of the year from July 1. They incur interest of $30,000 for the year.

    Kosta and Jenny can each make an interest claim of $15,000 on their respective tax returns for the first year of the property.

    Example: Claiming part of the interest incurred

    Yoko takes out a loan of $400,000 from which $380,000 is to be used to buy a rental property and $20,000 is to be used to buy a new car.

    Yoko's property is rented for the whole year from 1 July. Her total interest expense on the $400,000 loan is $35,000.

    To work out how much interest she can claim as a tax deduction, Yoko must do the following calculation:

    Total interest expenses

    x

    rental property loan
    total borrowings

    =

    deductible interest

    That is:

    $35,000

    x

    $380,000
    $400,000

    =

    $33,250

    Yoko works out she can claim $33,250 as an allowable deduction.

    Attention

    If you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals and is used for both private purposes and rental property expenses, you must keep accurate records to enable you to calculate the interest that applies to the rental property portion of the loan. You must separate the interest that relates to the rental property from any interest that relates to the private use of the fund.

    End of attention

    Example: Interest incurred on a mortgage for a new home

    Zac and Lucy take out a $400,000 loan secured against their existing property to purchase a new home on the other side of town.

    Rather than sell their previous home they decide to rent it out.

    They have a mortgage of $25,000 remaining on their existing home which is added to the $400,000 loan under a loan facility with sub-accounts - that is, the two loans are managed separately but are secured by the one property.

    Zac and Lucy can claim an interest deduction against the $25,000 loan for their previous home, as it is now rented out.

    They cannot claim an interest deduction against the $400,000 loan used to purchase their new home as it is not being used to produce income even though the loan is secured against their rental property.

    What records do you need to keep?

    You need to keep proper records in order to make a claim, regardless of whether you use a tax agent to prepare your tax return or you do it yourself. You must keep records of:

    • the rental income you receive and the deductible expenses you pay - keep these records for five years from 31 October or, if you lodge later, for five years from the date your tax return is lodged
    • your ownership of the property and all the costs of purchasing/acquiring and selling/disposing of it - keep these records for five years from the date you sell/dispose of your rental property.
    Attention

    As a capital gains tax (CGT) may apply if you sell your rental property, we recommend you keep records of every transaction over the period of ownership of the property. This would include contracts of purchase and sale, and conveyance and loan documentation.

    End of attention

    Keeping these records will help you work out your capital gain or loss correctly and ensure you do not pay more tax than you need to.

    Further Information

    For information about easy ways to keep your records, refer to part A of Guide to capital gains tax (NAT 4151) - 'Keeping records' - 'Asset registers'.

    End of further information

    What to do/read next

    For more information about other rental property expenses you can claim, refer to the following:

    For help in applying this information to your own situation, phone us on 13 28 61 between 8.00am and 6.00pm, Monday to Friday.

    • Last modified: 03 Jan 2012QC 20067