Claiming Interest On Your Rental Property
How Do You Claim Interest And Other Loan Costs On Your Rental Property The Right Way?
Are you paying off a loan for your rental property? Rental property owners should take notice of the ATO’s warning that it will target mistakes with rental property deductions this tax time.
Over claiming interest on a rental property is one of the most common mistakes and could expose you to an ATO audit. So it makes sense to know how and what you can claim in relation to the loan you took out to buy your rental property.
Claiming Interest Expenses On Your Rental Property
The general rule is that you can deduct interest expenses on a loan you’ve taken out to buy the property to the extent the property is used for generating rental income. You can generally deduct these interest expenses in the year you incur them.
You can also deduct interest expenses on loans to fund repairs and renovations, or to purchase depreciating assets (e.g. an air conditioner).
But beware: there are traps when you start mixing private use with income-producing use. This happens if you use the property for private purposes, even to a small extent, as well as renting it out.
The other big trap is using part of the rental property loan for private purposes (e.g. to buy a car or pay for personal living expenses). This also includes where you redraw available loan funds to pay for private expenses.
In these cases, you’ll only be able to claim a portion of your interest expenses. You’ll need to keep records to substantiate what portion is private and what portion is related to your rental property.
When you make a loan repayment, the ATO considers it to be apportioned across both private and rental purposes. You can’t “cherry-pick” by earmarking some loan repayments as related to the “private” part of the loan and other repayments as relating to the “rental property” part of the loan.
Your claim needs to stack up. Over claiming interest is on the ATO’s hit list of common mistakes this tax time. The ATO is also looking out for holiday rentals that aren’t genuinely available for rent, and properties that are leased at “mates’ rates” to friends and family.
Claiming Borrowing Expenses On Your Rental Property
Are you claiming the full range of loan costs you’re entitled to? You can deduct costs like loan establishment fees, mortgage brokerage fees and costs of other necessary services that are directly related to taking out the loan for the rental property (such as title searches and property valuations required by the lender).
In some cases, you’ll need to carefully distinguish between costs of taking out the loan, and costs of buying the property:
- Legal services of preparing and lodging mortgage documents are deductible as loan costs, but conveyancing fees for purchasing the property are not – they’re included in the cost base of the property for CGT purposes.
- Similarly, any stamp duty on a registered mortgage is deductible, but stamp duty on the purchase of the property is not – it’s also included in the cost base of the property for CGT purposes.
While you can’t claim any premiums for insurance you take out to pay out the loan in the event of your death, disablement or unemployment, you can deduct any lender’s mortgage insurance.
Watch out for special timing issues. Unless your total deductible loan costs are below $100, you’ll need to claim the costs of taking out the rental property loan over five years or the term of the loan, whichever is the shorter period.
As with interest expenses, you can only deduct a portion of your loan costs if the loan will also be used partly for private purposes.
We’ll Help You Get It Right
Whether you’re planning finance for a new investment property or already paying off an existing loan, talk to us for expert assistance in getting your annual rental property deductions right.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.