What is a mortgage interest tax deduction?
Like any deduction, tax-deductible mortgage interest is subtracted from your taxable income. Say you earn $20,000 a year in rental income from your investment property. If your interest bill the same year is $10,000, you could potentially deduct that cost, bringing your taxable income from the property down to $10,000.
Can you claim interest as a tax deduction in Australia?
In Australia, you can only claim interest charged on investment home loans at tax time. If you borrow to buy shares, bonds, or another investment type, you might also be able to deduct related interest costs.
In other countries, including the US, you may also be able to deduct the interest you pay on your owner-occupier home loan, but the Australian Tax Office (ATO) only allows deductions if the property related to the loan is earning assessable income or you’ve sold it for a profit (or both).
How does negative gearing work?
If your investment property runs at a loss (it costs more to own each year than it earns in rental income, the ATO says may be able to deduct the loss against your other taxable income—your salary, for example). This is called negative gearing.
Say your salary is $90,000 a year and you have an investment property. You’re paying $15,000 a year in interest related to that property, as well as other expenses like property management fees and repair bills. Meanwhile, you’re earning just $10,000 in rent.
- If negative gearing applies, you can deduct that $5,000 loss against your salary, so you’ll be assessed by the ATO as if your income was $85,000.
- If negative gearing does NOT apply, you can still deduct your expenses from any income you earn from the property, but you can’t offset against your other income. However, you may be able to use this loss to offset income you earn in the future (this is called carrying a loss forward).
Here are Australia’s current negative gearing system:
Type of investment property | Bought before 12 May 2026 | Bought after 12 May 2026 |
|---|---|---|
Established property | You can claim losses against your other taxable income for as long as you own the property. | From 1 July 2027, losses are only deductible against income from residential properties, including capital gains, although investors may be able to carry losses into future tax years. |
New build | You can claim losses against your other taxable income | You can claim losses against your other taxable income |
Source: Budget 2026-27
What are some common traps when deducting mortgage interest?
The ATO often audits interest deductions at tax time as, it says, many are filed incorrectly. Here are a few common mistakes:
- If you cross-collaterise, meaning you fund the purchase of two properties using one loan, and your mortgage has been used to fund both your home and your investment property, you can only claim the portion of interest related to the investment as a deduction.
- Tax deductions related to jointly-owned investment properties must be divided properly between the owners.
- You can’t claim interest costs during periods you’re using your investment property privately. For example, if you spend a month in your holiday home, you’ll only be able to deduct 11 months’ of home loan interest costs.
- If you redraw funds from your investment loan and use the money for something that doesn’t generate income, you might not be able to claim the interest charged on the redrawn portion.
How much mortgage interest can you deduct each year?
Any interest you’re paying on your investment home loan is fully deductible against any income from that property, according to the ATO. You can’t deduct any cost born from paying the principal back, nor interest that’s going towards property that isn’t generating income or genuinely available for rent. So, if you rent out your holiday home for six months in a year, you might only be able to claim half the interest you pay on that loan that year.
How do you claim the mortgage interest deduction at tax time?
How you can claim mortgage interest costs at tax time will depend on how you’re submitting your return. If you’re going through an accountant, you can likely simply supply your home loan-related statements and they’ll do the hard work for you.
Otherwise, it’s best to check what information you need to provide by studying the ATO website.
What other property-related expenses can you deduct on tax?
There can be plenty of other expenses involved with owning and renting out an investment property, many of which are deductible. Examples include:
- Repairs
- Costs related to advertising for tenants
- Property management fees
- Cleaning costs
- Landlord insurance premiums
- Bank and solicitor fees
Other expenses might be able to be claimed through depreciation over a number of years. This is generally the case for larger expenses, like renovations or major repairs.
What expenses can’t you deduct?
- The cost of travelling to and from your investment property, unless your business is property investing.
- Initial repairs made right after buying are considered capital expenses. You might be able to add these costs when working out how much capital gains tax (CGT) you owe once you sell.
- If you’re renting to family and friends and not charging a market rate, your property may be deemed ‘mixed use’ and not used entirely for producing income, so the portion of interest you can deduct may be reduced.
If you’re unsure or want more information, it’s probably worth seeking out independent tax advice from a registered tax agent or accountant.
