Edited version of private advice

Authorisation Number: 1052407427923

Date of advice: 17 June 2025

Ruling

Subject: Interest deductions for rental purposes

Question

Will you be entitled to claim a full deduction of interest incurred on a loan used to acquire a property that is currently owned by your spouse and used as your shared principal place of residence, once the property is converted into an income-producing investment and begins generating assessable rental income?

Answer

Yes. Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), a taxpayer can deduct any loss or outgoing to the extent that it is incurred in gaining or producing assessable income. Once the property is converted into an income-producing asset, interest expenses on the loan may be deductible to the extent they relate to that income-producing purpose.

However, for the interest to be deductible, the property must be genuinely available for rent. This means it must be advertised in a way that gives it broad exposure to potential tenants, offered at a market rate, and not subject to unreasonable conditions that would limit its rental potential. The ATO will consider the taxpayer's intention and actions in determining whether the property is genuinely available for rent.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

X July 20XX

Relevant facts and circumstances

You intend to purchase a residential property currently owned by your wife. The property is subject to an existing mortgage of $XX with the XX, held in your wife's name.

You and your wife have jointly resided in the property since XX, and it has served as your principal place of residence during that time.

The property is located at XX XX, XX. The property number has been changed from XX XX by XX following a subdivision. The original contract of purchase for XX XX has been provided, including the relevant page noting the property as Lot XX on the proposed layout plan. Also, a copy of the Home and Contents Insurance addressed to XX XX has been provided.

Your wife intends to sell the property for $XX, a figure mutually agreed upon as a fair and reasonable amount. This valuation was determined to facilitate the conversion of the property into an investment asset, with the loan to be solely serviced by you and structured to be positively geared for investment purposes.

The estimated market value of the property is between $XX and $XX. The anticipated rental income is projected to range from $XX and $XX per week.

You propose to purchase the property for $XX, funded by a new loan with an interest rate of approximately X%. The bank has been consulted, the loan application has been submitted, and serviceability has been assessed and approved. The loan proceeds will be paid directly to your wife, with the following allocation:

$XX will be used to discharge the existing mortgage with XX,

$XX will be deposited into an offset account linked to your wife's current investment property at XX XX, XX. These funds are intended to be used for the future purchase of a new principal place of residence.

You intend to acquire XX% ownership of the property from your spouse. Following the purchase, you will be the sole claimant of interest deductions associated with the property, which will be held entirely in your name.

You have indicated that separate solicitors will be engaged to execute the contract of sale, as both parties require independent legal representation. XX has outlined the fees involved in the transaction and confirmed the need for separate representation. Historically, you and your wife have engaged two solicitors - XX and XX - during the original purchase of the property. However, as XX has since passed away, a new solicitor will need to be appointed, though one has not yet been selected. An email from XX confirming these details has been provided.

The new principal place of residence will be jointly purchased and owned by both you and your spouse.

Relevant legislative provisions

Section 8-1 of the Income Tax Assessment Act (ITAA 1997)

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