You can visit the ATO Publication Ordering Service to download a copy of the Rental interest expensesExternal Link fact sheet.
What you can claim
You can claim interest expenses you incur on the loan that you use to:
- buy a rental property
- buy a depreciating asset for the rental property (for example, a new air conditioner)
- make repairs to the rental property (for example, roof repairs due to storm damage)
- finance renovations to the rental property
- pre-pay expenses for the rental property up to 12 months in advance.
What you can’t claim
You can't claim any payments for paying off the principal of your loan.
You can't claim interest:
- for periods you use the property for private purposes, even if it’s for a short time
- on any part of the loan
- used for private purposes on the initial loan or if you refinance
- that you redraw for private purposes, even if you're ahead in your repayments
- used to buy a new home if you don't use it to produce income, even if you use your rental property as security for the loan
- on funds used to buy vacant land, until the time construction of your rental property is complete and available for rent.
If your loan was used to buy a rental property and something else, such as a car, you can't just repay the part relating to your personal purchase, even when you refinance. All loan repayments are apportioned across both purposes until all the loan has been repaid and you are no longer claiming interest expenses for that property.
Examples – interest expenses
Example: claiming share of interest incurred – joint borrowers and joint owners
Kosta and Jenny take out an investment loan for $350,000 to buy an apartment they hold as joint tenants.
They rent out the property for the whole year from 1 July. 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 owning the property.
End of example
Example: claiming part of the interest incurred
Yoko takes out a loan of $400,000, with $380,000 to be used to buy a rental property and $20,000 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 expenses × (rental property loan ÷ total borrowing) = deductible interest
$35,000 × ($380,000 ÷ $400,000) = $33,250
Yoko works out she can claim $33,250 as an allowable deduction.
End of example
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 buy a new home.
Rather than sell their existing 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 facility with sub-accounts, this means the 2 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 original home as it is now rented out.
They can't claim an interest deduction against the $400,000 loan used to buy their new home as it isn't being used to produce income, even though the loan is secured against their rental property.
End of exampleThis is a general summary only.
For more information:
- see Residential rental properties
- watch our short videos at Rental property video series
- download our Rental properties guide
- read our Capital gains tax guide.