How to get a tax deduction for interest on a home loan

What is the mortgage interest tax deduction?

The mortgage interest tax deduction is a deduction you can claim on the interest charged on your home loan if the property you bought with the loan is generating taxable income. Investment properties will qualify but no deduction is available for interest on your family home.

The basic tax rule when borrowing to fund an investment property is that interest charges on a mortgage to acquire an investment property are tax-deductible, while principal (or capital) repayments are not.

The tax-deductibility of interest is part of what makes property such an attractive investment for many, because it is a key component in ‘negative gearing’ – the ability to offset losses (partly caused by those interest deductions) against other income on your tax return.

Can I claim mortgage interest on my taxes in Australia?

If the property is earning assessable income (rent, for example) then yes, the ATO says you can claim mortgage interest on your taxes when completing your tax return.

Only the interest component directly related to your investment property is tax-deductible. If you are paying principal and interest on your loan, you will need to calculate the interest component each year based on your loan statements.

In addition to interest relating to the property acquisition, you can also claim a deduction for interest on loans taken out to: carry out renovations, purchase depreciating assets (such as furniture), make repairs or carry out maintenance.

You generally cannot claim a deduction for interest on loans taken out to purchase land on which a property is to be built (i.e. vacant land) until the property is actually complete and being marketed for rent.

What are some common traps of the mortgage interest tax deduction?

Each year, the ATO focuses substantial audit activity on claims for interest deductions because so many of them are incorrect. Here are a few of the common traps, plus a few tips for maximising your claim:

• Don’t mix investment and private borrowings, (for example, taking out one loan to acquire your family home and investment property)
• Make sure interest claims are divided properly on jointly owned properties
• Don’t claim interest for periods your investment property is used for private purposes (such as when you spend time at your holiday home that is usually rented out)
• Don’t use any of your investment loan for private purposes, such as buying a new car or renovating your family home
• Don’t claim interest on your family home or any other property not used for income earning purposes.

How much mortgage interest can you deduct each year?

If the loan relates entirely to an investment property, you can deduct all of the interest charged. You can’t deduct the repayments of the principal sum borrowed, nor can you deduct interest on a property you aren’t using to earn an income.

How do you claim the mortgage interest deduction on your tax return?

When doing your taxes each year, you can claim the deduction at item 21 of the tax return, which is the section for recording rent from investment properties. Mortgage interest deductions are claimed at box Q of that item.

What other property-related expenses can you deduct on tax?

There are lots of other things you can claim, some more obscure than others. If any of these apply to you, make sure you include them in your tax return:

• Borrowing fees (i.e. costs of arranging the mortgage) (Note that if total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less)
• Depreciation of plant and equipment and fixtures and fittings (Note that owners of second-hand residential properties who exchanged contracts after 7:30pm on 9 May 2017 cannot claim deductions for previously used plant and equipment assets)
• Capital works (i.e. building) depreciation
• Repair costs
• Land tax
• Advertising for tenants, including costs passed on by letting agents
• Cleaning costs at the end of a tenancy (including removal of rubbish)
• Estate and letting agent costs (including management fees)
• Gardening and lawn mowing costs (including for felling or pruning trees)
• Secretary and bookkeeping fees associated with the collection of rent and payment of property expenses
• Bank charges on the account used to receive rent and pay expenses
• Council rates
• Insurance costs (building, contents or public liability)
• Credit checks
• Pest control fees
• Bank or solicitor fees for keeping title documents safe
• Taxation advice fees relating to the property
• Legal expenses to eject a tenant for non-payment of rent
• Hiring a debt collector to collect rent arrears
• Getting new keys cut
• Servicing items such as hot water heaters, smoke alarms, air-conditioning systems and garage door mechanisms
• Water supply charges (to the extent that they aren’t paid by the tenant)
• Quantity surveyor fees
• Security patrol costs
• Security system monitoring and maintenance costs
• Tax agent fees.

What property-related expenses can you not deduct on tax?

You can’t claim repairs for newly purchased rental properties. The costs to repair damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately, and are deductible instead over a number of years or added to the cost base of the property for capital gains tax (CGT) purposes.

In addition, travel expenses relating to your residential rental property are not deductible unless you are carrying on a business of property investing.

Be careful when claiming deductions for properties that are rented out to friends or family at a discounted rate. This will be regarded as a non-commercial rental. The income will still be taxable but you’ll only be able to claim deductions up to the amount of rent you’ve received. You won’t be able to make a loss; if you were relying on negative gearing, that isn’t a desirable outcome.