The types of borrowing expenses you can claim as income tax deductions for taking out a loan to purchase a rental property
You can claim all of the following:
- stamp duty charged on the mortgage
- loan establishment fees
- title search fees charged by your lender
- costs (including solicitors' fees) for preparing and filing mortgage documents
- mortgage broker fees
- fees for a valuation required for loan approval
- lender's mortgage insurance, which is insurance taken out by the lender and billed to you.
You cannot claim any of the following:
- stamp duty charged by your state/territory government on the transfer (purchase) of the property title
- legal expenses including solicitors' fees for the purchase of the property (these are capital expenses)
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This stamp duty and legal expenses may be included in calculating the 'cost base' of the property for capital gains tax (CGT) purposes. For more information, refer to Guide to capital gains tax (NAT 4151).
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- stamp duty you incur when you acquire a leasehold interest in property such as an Australian Capital Territory 99-year crown lease (you may be able to claim this as a lease document expense)
- insurance premiums where, under the policy, your loan will be paid out in the event that you die, become disabled or unemployed (this is a private expense)
- borrowing expenses on the portion of the loan you use for private purposes (for example, money you use to invest in a super fund).
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If your total deductible expenses are more than $100, the deduction you claim for those expenses must be spread over five years or the term of the loan, whichever is less. If the total deductible borrowing expenses are $100 or less, you can claim the deduction in full in the income year you incur them.
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If you repay the loan early and in less than five years, you can claim a deduction for the balance of the borrowing expenses in the year of repayment.
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If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year you had the loan.
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Example
On 3 July 2010, Peter took out a 25-year loan of $300,000 to purchase a rental property. Peter's deductible borrowing expenses were:
- $800 stamp duty on the mortgage
- $500 loan establishment fees
- $300 valuation fees required for loan.
Peter also paid $1,200 stamp duty on the transfer of the property title for which he cannot claim a tax deduction. However, this expense will form part of the 'cost base' of the property for capital gains tax (CGT) purposes.
As Peter's borrowing expenses are more than $100, he must claim them over five years from the date he took out his loan for the property. He would work out the borrowing expense deduction for the first year as follows:
2010-11 (363 days)
Borrowing expenses
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x
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Number of relevant days in year
number of days in 5 years
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=
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deduction for year
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$1,600
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x
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363
1,826
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=
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$318 deduction on his 2011 tax return
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Borrowing expenses remaining
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x
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Number of relevant days in year
remaining number of days in
5 years
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=
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deduction for year
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$1,282
(that is,
$1,600 - $318)
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x
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366
1,463
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=
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$320 deduction on his 2012 tax return
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$962
(that is,
$1,282 - $320)
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x
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365
1,097
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=
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$321 on his 2013 tax return
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$641
(that is,
$962 - $321)
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x
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365
732
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=
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$320 deduction on his 2014 tax return
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$321
(that is,
$641 - $320)
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x
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365
367
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=
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$319 deduction on his 2015 tax return
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$2
(that is,
$321 - $319)
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x
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2
2
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=
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$2 deduction on his 2016 tax return
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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 it and selling/ disposing of it - keep these records for five years from the date you sell or dispose of your rental property.
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As capital gains tax 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.
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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.
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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'
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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: Friday, 5 October 2012