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Can I get a tax deduction for interest on a home loan?

Vidhu Bajaj avatar
Vidhu Bajaj
- 4 min read
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Key highlights

  • Home loan interest can be tax-deductible if the property is used for investment purposes, such as renting it out. Owner-occupiers living in their homes cannot claim this deduction.
  • Interest on a home loan can be deducted on your tax return if the property is used to earn income, such as through a home business or a home office. Residential properties solely used for residential purposes are not eligible for tax deductions.
  • The interest on a home equity loan can be tax-deductible if the loan is used for income-producing purposes, such as investing in a rental property or a home business. Personal use of the loan, such as purchasing a residence to live in, does not qualify for tax deductions.
  • As a homeowner with a mortgage, you might wonder if the interest paid on a home loan is tax-deductible. This is a crucial consideration for anyone looking to maximise their tax savings. 

    Specifically, home loan interest can qualify as a tax deduction if the property is used for investment purposes, such as renting it out. However, if you are an owner-occupier living in your home, you cannot claim this deduction. This distinction is vital for effective financial planning and meeting eligibility requirements for tax deductions. 

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    Understanding mortgage tax deductions

    As a responsible tax-payer in Australia, you may wonder how you can save on your taxes. One common query is whether interest paid on a home loan can be deducted from your taxes. 

    Suppose you've taken out a home loan to purchase a property that you're now renting out to tenants. As you make your loan repayments, you're likely paying interest to the lender. This might lead you to wonder if this interest expense can be deducted on your tax return. 

    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. But if your residential property is being used to produce income, such as through a home business or a home office, you could claim some tax deductions. 

    While the property is rented out or actively listed for rent, you could also claim interest on loans that were obtained for the following purposes: 

    • Purchasing depreciating assets for the property 
    • Conducting repairs on the property
    • Undertaking renovations on the property.

    When you cannot claim a mortgage tax deduction

    Understanding when you cannot claim a deduction is as important as knowing 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 the property is your primary residence and you are not generating any income from it. 
    • If you refinance your investment property loan for personal use, such as buying a car, the interest on the refinanced amount is not tax-deductible. 
    • If a loan is used for both rental and personal purposes, only the interest that directly relates to the rental or income-producing portion can be deducted. 
    • 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 their use for income-producing purposes. In simpler words, if you have taken out a home loan, the funds must be used specifically for purchasing a property that generates income in order to claim the interest as a tax deduction. 

    Is a home equity loan tax deductible?

    Whether you can deduct the interest on a home equity loan from your taxes depends on what you use the money for. If you borrow against your home to invest in something that will make money, like a rental property or a home business, then the interest you pay on that loan can be deducted. 

    It’s important to keep detailed records to prove that your loan is being used for income-producing purposes, as this is essential for claiming a tax deduction on the interest. However, if the loan is used for personal reasons, such as purchasing a residence to live in, then the interest incurred is not eligible for tax deductions. 

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    Product database updated 06 Nov, 2024

    This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.