Video transcript - Claiming mortgage and interest expenses for your rental property
So you’ve taken out a mortgage to purchase your rental property but did you know that you could claim a deduction for the costs to set up your loan?
Sara, what were you able to claim?
Over five years we claimed the loan establishment and title search fees and costs for preparing and filing the mortgage documents, plus the broker fee and stamp duty.
The lender also had some conditions before we could get the money. We had to get a valuation and take out mortgage insurance but we could claim those costs too.
OK, on the other hand give me an example of what you couldn’t claim as a mortgage set-up cost?
Things such as insurance policy premiums that would pay out our loan on the property if something tragic happened to us.
One of the most common rental property deductions is interest – not just to purchase the property, but also if you borrow for repairs or renovations.
However, the property must be rented, or available for rent, in that income year. And you can’t claim the interest for times that you use the property yourself.
You also can’t claim interest on a loan that is used partly for private purposes.
Let’s take a look at an example.
Sara and Phil had a $450,000 mortgage, but $50,000 was used to purchase a private car. Let’s assume the interest rate was 5%, so the yearly interest was $22,500.
As Sara and Phil only used $400,000 to buy their rental property they could only claim $20,000 of the interest.
The other $2,500 was interest for the car and not deductible.
End of example
If your loan balance goes up and down due to multiple deposits and withdrawals, and it’s for both private and rental property use, you’ll need to separate the interest that relates to the rental property from any interest that relates to the private use of the funds.
Now, Sara had an experience where she couldn’t claim a deduction because the loan wasn’t used to produce income.
We decided to build a new home, and to rent out our old one. So we got a $200,000 mortgage secured against the old house.
As the purpose of the loan was for our new home, we found that none of the interest was deductible, even though it was secured against what is now a rental property.
And be careful of more complicated loan and repayment arrangements, especially if they’re marketed as allowing you to claim additional deductions. These loans typically involve a line of credit or split loan and are designed to allow you to pay off your home loan faster while deferring payments on your rental property loan.
The ATO may disallow your deductions so it’s best to seek advice or contact the ATO. Remember, if it sounds too good to be true, it probably is.
If it all sounds a bit tricky, or if you have difficulty calculating your interest deduction, my best suggestion would be to contact your tax adviser or the ATO.
If you’d like to find out more and to watch other videos in the series go to ato.gov.au/rental
This video focuses on deductions available for setting up a mortgage and what you can and can't claim for interest.