Mortgage discharge expenses



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The costs of discharging a mortgage are deductible in the year they are incurred to the extent that you gave the mortgage as security for the repayment of money you borrowed that was used to produce assessable income.

For example, if you used a property to produce rental income for half the time you held it and used it as a holiday home for the other half, 50% of the costs of discharging the mortgage are deductible.

Penalty interest payments are amounts paid to a lender, such as a bank, to agree to accept early repayment of a loan-including a loan on a rental property. The amounts are commonly calculated by reference to the number of months interest payments would have been made had the premature repayment not been made.

Penalty interest payments relating to a rental property are deductible:

  • if the loan moneys borrowed are secured by a mortgage over the property and the payment effects the discharge of the mortgage, or
  • if payment is made in order to rid the taxpayer of a recurring obligation to pay interest on the loan.

Where penalty interest is paid to rid a taxpayer of a burdensome property or is otherwise incidental to the sale of the property, the payments are not deductible.

Last modified: 18 Jul 2008QC 16578