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The types of interest expenses you can claim as income tax deductions.
You can claim the interest charged on the loan you used to:
You can also claim interest you have pre-paid up to 12 months in advance.
For more information about claiming pre-paid expenses, refer to Deductions for prepaid expenses.
You cannot claim interest:
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
rental property loan
Yoko works out she can claim $33,250 as an allowable deduction.
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.
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.
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:
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.
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.
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'.
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.
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