Rental Property

If you take out a loan to purchase a rental property, you can claim the interest charged on that loan, or a portion of the interest, as a deduction. However, the property must be rented, or available for rental, in the income year for which you claim a deduction.

If you start to use the property for private purposes, you cannot claim any interest expenses you incur after you start using the property for private purposes.

Borrowing to Upgrade

While the property is rented, or available for rent, you may also claim interest charged on loans taken out:

•     to purchase depreciating assets
•     for repairs
•     for renovations.

Land or Renovations

Similarly, if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out.

Change your Mind

However, if your intention changes, for example, you decide to use the property for private purposes and you no longer use it to produce rent or other income, you cannot claim the interest after your intention changes.

Apportion Interest between Business and Private Use Loans

Banks and other lending institutions offer a range of financial products which can be used to acquire a rental property. Many of these products permit flexible repayment and redraw facilities. As a consequence, a loan might be obtained to purchase both a rental property and, for example, a private car. In cases of this type, the interest on the loan must be apportioned into deductible and non-deductible parts according to the amounts borrowed for the rental property and for private purposes.

Why you need Separate Business Loans

If you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals and it is used for both private purposes and rental property purposes, you must keep accurate records to enable you to calculate the interest that applies to the rental property portion of the loan; that is, you must separate the interest that relates to the rental property from any interest that relates to the private use of the funds.

Home turned into Rental Property

Some rental property owners borrow money to buy a new home and then rent out their previous home. If there is an outstanding loan on the old home and the property is used to produce income, the interest outstanding on the loan, or part of the interest, will be deductible.

However, an interest deduction cannot be claimed on the loan used to buy the new home because it is not used to produce income. This is the case whether or not the loan for the new home is secured against the former home.

Contact us

The deductibility of interest is a bit tricky, and because the numbers are usually high, you need some sound professional advice.  Contact Noel or Amanda on (03) 9585 7555 or email noel@noelmay.com.au