As a responsible tax-payer in Australia, you may wonder how you can save on your taxes. You may consider if you could get a tax deduction for interest on a home loan.
You’ve taken out a home loan to buy a property, and you’re using it for investment purposes by renting it out to tenants. As part of your loan repayments, you would be paying interest to the lender so you might be wondering whether you’re eligible for a tax deduction on home loan interest.
The short answer is yes. You can claim the interest charged on your home loan as a deduction when completing your income tax return. However, you need to be using the property to earn income by renting it out because solely residential property isn’t eligible for any tax deductions. On the other hand, if your residential property is being used to produce income like home business or a home office, you could claim some tax deductions.
Also, your home equity loan interest is tax-deductible, provided you use the loan to buy, build, or improve the home that is a security for the loan.
It may help you understand when you can claim a tax deduction on your property by understanding when you can’t. The below scenarios are just some examples of when you’re NOT permitted to claim a tax deduction on your property:
- If you begin using the secured property for living as your primary residential property without making an income from it.
- If you refinance your investment loan for some other purpose like buying another property.
- If you use the loan for a private purpose, other than the purchase of a home.
- If you have an investment property like a holiday home, which is not rented out, then you can't claim deductions because it doesn't generate rental income.
A tax deduction on the home loan interest is possible only if there is a direct relationship between the borrowed money and the purpose for which the money is used. In simpler words, if you had taken out a home loan, then you should have bought a property with that money.
Claiming a tax deduction on home loan interest when purchasing a rental property
Yes, you can claim a deduction if you have used part of the home loan amount to purchase a rental property.
Banks and other financial institutions have various loan products that you, as a consumer, may use to buy a rental property. So, if you take a mixed-purpose loan, for example to purchase both a rental property and a car, only the interest on that part of the loan that was utilised for buying the rental property would be deductible for tax purposes.
Some loan products have flexible repayment options and redraw facilities. Suppose you utilise these on your loan account by regularly depositing and withdrawing funds. In that case, you’ll need to keep records of these transactions. This is especially true if the money is spent partly towards your rental property and partly for other purposes. To claim a tax deduction, you’ll need to calculate the interest that applies to the rental property portion of the loan. You’ll have to maintain precise records to help with these calculations.
You may take out a home loan to purchase a new property and give out your earlier home on rent. However, you cannot claim an interest deduction on the loan you’ve used to buy the new property because unless it’s producing income.
If you have taken other loans to purchase depreciating assets or for repairs or renovation of your rented property, then you can claim interest charged on those as tax-deductible.