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.
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), or
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 expense
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.
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:
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, and
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.
For information about easy ways to keep your records, refer to 'asset registers' in chapter 3 of part A of Guide to capital gains tax (NAT 4151).
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