Can I Claim Interest on My Rental Property Loan?

Yes, you may be able to claim interest on a rental property loan.

But only where the borrowed money was used for the rental property or rental income-producing purpose.

That is the key point.

The bank might call it an investment loan.
You might call it the rental loan.
Your spreadsheet might call it “house loan thing”.

Tax law asks a different question:

What was the borrowed money used for?

If the loan was used to buy the rental property, the interest may be deductible.

If part of the loan was used for private spending, that part of the interest may not be deductible.

Simple idea.

Messy in real life.

GoTax helps Australian rental property owners complete tax returns online, with returns checked by registered tax agents before lodgement.

Start your rental property tax return online with GoTax

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Why rental loan interest matters

Loan interest is often the biggest rental property deduction.

For many landlords, it can make the difference between:

• rental profit

• rental loss

• negative gearing

• smaller tax bill

• refund impact

• ATO questions

But because interest can be a large claim, it is also an area that needs to be right.

The ATO does not just look at the size of the loan.

It looks at the purpose of the borrowing.

That means you need to know:

• what the loan was originally used for

• whether any redraws were made

• whether the loan was refinanced

• whether private spending was added

• whether the property was rented for the full year

• whether the property was partly private use

• whether the loan relates to more than one purpose

Interest is not deductible because the loan feels connected to the property.

It needs to actually be connected.

Tax law is sentimental like a brick.

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When rental loan interest may be deductible

You may be able to claim interest where the borrowed money was used to:

• buy the rental property

• fund rental property repairs

• fund rental property improvements, subject to correct treatment

• pay rental property expenses

• refinance an existing rental property loan

• fund costs connected to earning rental income

The important point is the purpose of the borrowing.

Example:

You borrow $500,000 to buy a rental property.

The property is rented out or genuinely available for rent.

The interest on that loan may be deductible.

That is the clean version.

Tax likes clean versions.

Sadly, real life prefers redraws, refinancing and “we just used the loan for a few things”.

That is where the trouble starts.

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Interest is different from principal

You generally claim interest, not principal repayments.

A loan repayment may include:

• interest

• principal

• fees

• offset adjustments

• redraw movements

Only the interest component is usually relevant for the interest deduction.

Example:

Loan repayment	Amount
Total monthly repayment	$3,000
Interest component	$2,200
Principal component	$800

The potential interest deduction is not $3,000.

It is the interest component, subject to the rental-use rules.

The principal repayment reduces the loan.

It does not become a tax deduction just because paying it hurt.

Pain is not deductible.

A major gap in the system.

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The loan purpose matters more than the loan name

The name on the bank account is not enough.

A loan might be called:

• investment loan

• home loan

• rental property loan

• property loan

• mortgage

• redraw loan

• line of credit

That label does not decide the tax result.

The tax question is:

What was the money used for?

Example:

Loan use	Interest issue
Borrowed to buy rental property	May be deductible
Borrowed to renovate rental property	May be deductible, but treatment of works matters
Borrowed to buy private car	Private portion not deductible
Borrowed for family holiday	Private portion not deductible
Borrowed for mixed rental and private use	Interest may need apportionment

The bank gives the loan a name.

Tax law follows the money.

The money is often less flattering.

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Redraws can create problems

Redraws are one of the biggest rental loan traps.

A redraw happens where you pay extra into the loan and later draw money back out.

The tax issue is the purpose of the redraw.

Example:

You have a rental property loan.

You redraw $30,000 to buy a private car.

That redraw is private.

The interest on that private portion may not be deductible.

Even though the redraw came from the rental property loan.

Even though the bank still shows one loan.

Even though the property is still rented.

The private purpose can contaminate part of the interest claim.

Redraw is not the same as free tax money hiding in the loan.

It is new borrowing.

And tax law wants to know what the new borrowing was used for.

Rude.

But important.

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Private redraw example

Let’s say Mia owns a rental property.

Her rental loan balance is $600,000.

She redraws $40,000 to buy a family car.

Her loan balance becomes $640,000.

The $40,000 was used for a private car.

That means the interest may need to be split between:

• the rental portion, and

• the private portion

Mia may not be able to claim interest on the full $640,000.

The bank statement may show one loan.

The tax return may need two purposes.

That is why redraw records matter.

Without them, the loan history can become a swamp.

A swamp with interest.

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Refinancing a rental property loan

Refinancing does not automatically ruin the interest deduction.

If you refinance an existing rental property loan and the new loan replaces the old rental loan, the interest may still relate to the rental property.

But refinancing can create problems if you increase the loan for private purposes.

Example:

Refinance situation	Possible treatment
Refinance $500,000 rental loan into new $500,000 loan	Interest may still relate to rental property
Refinance $500,000 rental loan into $550,000 loan and use $50,000 privately	Interest may need apportionment
Refinance and combine private and rental debts	Mixed-purpose loan issue
Refinance to fund rental improvements	Interest may relate to rental purpose, but works need correct treatment

The refinance is not the issue by itself.

The issue is what the new money was used for.

Tax law is not offended by refinancing.

It is offended by pretending private borrowings are rental borrowings.

Fair enough.

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Offset accounts vs redraw

Offset accounts and redraw facilities are often confused.

They can have very different tax consequences.

An offset account is usually a separate account linked to the loan.

Money in the offset can reduce the interest charged, but drawing from the offset may not be the same as redrawing from the loan.

A redraw is usually money taken back out of the loan after extra repayments have been made.

The details can matter.

Very much.

Especially if your home later becomes a rental property.

The safest approach is to keep clear records and get advice before moving large amounts around loans, redraw and offset accounts.

Banking products are designed to be convenient.

Tax consequences are designed to be discovered later, usually with regret.

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What if your former home becomes a rental?

This is very common.

You buy a home.

You live in it.

Later, you move out and rent it.

The interest deduction depends on the loan and how it was used.

If the original loan was used to buy the property and the property later becomes a rental, interest may be deductible from the time the property is rented or genuinely available for rent.

But problems can arise if, while it was your home, you:

• made extra repayments

• used redraw for private purposes

• refinanced for private spending

• mixed private and property borrowings

• changed loan structures

• used the loan for other assets

The property becoming a rental does not magically clean up the loan history.

If private borrowing was added earlier, that can still matter.

Tax law remembers.

Like an elephant.

With spreadsheets.

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What if the property was only rented part of the year?

If the property was only rented or genuinely available for rent for part of the year, the interest may need to be apportioned.

This can happen where:

• you bought the property part-way through the year

• the property became available for rent part-way through the year

• the property stopped being rented

• the property was sold

• the property changed from private use to rental use

• the property changed from rental use to private use

• the property was used as a holiday home for part of the year

Example:

You lived in the property until 30 September.

It was genuinely available for rent from 1 October.

The loan interest for the private period and rental period may need to be separated.

The dates matter.

Dates are not exciting.

They are still better than guessing.

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What if the property was vacant?

A vacant period does not automatically stop the interest deduction.

But the property generally needs to be genuinely available for rent.

You may need to consider:

• was it advertised?

• was the rent realistic?

• was it available to tenants?

• was it ready to rent?

• was it between tenants?

• were repairs being carried out?

• was it blocked for private use?

• were unreasonable conditions placed on tenants?

A normal vacancy between tenants may still be rental-related.

A property kept empty for family use is different.

The loan interest follows the rental purpose.

If the property is not genuinely available for rent, the deduction may need review.

The ATO is not fond of pretend availability.

It has calendars.

And patience.

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What about holiday homes and Airbnb?

Holiday homes and short-term rentals need extra care.

Interest may need to be apportioned where the property is used partly for private purposes.

This can happen with:

• Airbnb properties

• Stayz properties

• holiday homes

• family stays

• friends staying rent-free

• discounted rent to relatives

• blocked-out peak periods

• mixed rental and private use

Example:

You rent the property on Airbnb for part of the year.

You also use it for family holidays.

You may need to split the interest between rental use and private use.

The calendar matters.

The booking records matter.

The blocked dates matter.

“Available sometimes” is not enough by itself.

A beach house cannot claim to be fully rental while wearing your family’s Christmas towels.

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Co-owned rental properties

If the property is co-owned, interest is usually claimed according to the ownership share and actual borrowing arrangements.

Common ownership splits include:

• 50/50

• 70/30

• tenants in common

• joint tenants

The rental income and deductions are usually split based on legal ownership.

But loan responsibility and payment arrangements should also be checked.

Do not simply give the deduction to the person with the higher income because that looks better.

The title deed may have other ideas.

So may the ATO.

Household tax planning by wishful thinking is rarely robust.

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Records you need for rental loan interest

Keep records that show both the amount of interest and the purpose of the borrowing.

Useful records include:

• annual loan interest summary

• bank loan statements

• loan contract

• settlement statement

• refinance documents

• redraw records

• offset account records

• records showing how redraws were used

• invoices for rental property works funded by the loan

• records of private redraws

• records of loan splits

• records of ownership percentage

• records showing when the property was first rented

• records showing when the property was available for rent

• records of private-use periods

• short-term rental booking calendar, if relevant

The loan interest summary is useful.

But it may not tell the whole story.

It usually tells you the amount of interest.

It may not tell you whether all the interest is deductible.

That is the tax return’s problem.

Lucky us.

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Common rental loan interest mistakes

Avoid these:

Mistake	Why it matters
Claiming the full loan interest without checking purpose	Private-use borrowings may need apportionment
Ignoring private redraws	Redrawn funds may have a private purpose
Claiming principal repayments	Principal is not the interest deduction
Relying only on the loan name	Tax follows the use of funds
Forgetting part-year rental use	Interest may need apportionment
Ignoring holiday home private use	Private-use days matter
Treating all refinance interest as deductible	Extra private borrowings may need splitting
Losing redraw records	Makes apportionment harder
Ignoring offset/redraw differences	The structure can matter
Claiming interest before the property was available for rent	Timing matters

Rental interest claims can be large.

Large claims with weak records are not ideal.

They tend to glow in the dark.

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Simple checklist before claiming rental loan interest

Before claiming interest, ask:

• Was the loan used to buy the rental property?

• Was any part of the loan used privately?

• Were there redraws?

• What were the redraws used for?

• Was the loan refinanced?

• Did the refinance include private spending?

• Was the property rented for the full year?

• Was it genuinely available for rent?

• Was there any private use?

• Was it a holiday home or short-term rental?

• Do you have the annual interest summary?

• Do you have loan statements?

• Do you have records of ownership percentage?

• Do you have settlement and refinance documents?

If you cannot answer those, pause before claiming the full interest.

The interest deduction is useful.

But only if it is correct.

A big wrong deduction is not better than a small right one.

It is just louder.

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How GoTax helps

GoTax helps rental property owners complete tax returns online.

The system prompts you through rental income and expense areas, including rental loan interest, and your return is checked by registered tax agents before lodgement.

That can help with:

• loan interest summaries

• part-year rental use

• private redraw issues

• refinanced loans

• rental/private apportionment

• holiday home private use

• short-term rental records

• co-owner splits

• common rental deduction traps

• record issues

GoTax rental property tax returns start at:

$109 for one rental property

Additional rental properties are:

$40 per additional rental property

Start your rental property tax return online with GoTax

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Frequently asked questions

Can I claim interest on my rental property loan?

Yes, you may be able to claim interest where the borrowed money was used for the rental property or rental income-producing purpose.

Can I claim the whole loan repayment?

No. Loan repayments usually include principal and interest. The interest component is the relevant part for the interest deduction.

What if I redraw from my rental loan for private spending?

The interest on the private-use portion may not be deductible and may need to be apportioned.

Does refinancing affect the deduction?

Refinancing does not automatically stop the deduction, but if you increase the loan for private purposes, the interest may need to be split.

Can I claim interest if my former home becomes a rental?

You may be able to claim interest from when the property is rented or genuinely available for rent, but redraws, refinancing and private loan use need checking.

Can I claim interest while the property is vacant?

You may be able to claim interest if the property is genuinely available for rent, but private use or unavailable periods may need apportionment.

Can I claim interest on an Airbnb property?

You may be able to claim the rental-use portion, but private use, blocked dates and family use may need apportionment.

Is the bank interest summary enough?

It shows the amount of interest paid, but it may not prove that all the interest is deductible. Loan purpose and private-use records may still matter.

Can GoTax help with rental loan interest?

Yes. GoTax helps Australian rental property owners complete rental property tax returns online, with returns checked by registered tax agents before lodgement.

When is rental loan interest deductible?

Interest may be deductible where the borrowed money was used to buy the rental property, fund rental property repairs, fund rental property improvements (subject to correct treatment of the works), pay rental property expenses, refinance an existing rental property loan, or fund costs connected to earning rental income. The test is always the purpose the borrowed money was actually put to.

Does the name on my loan account decide whether interest is deductible?

No. A loan may be called an investment loan, home loan, rental property loan, mortgage, redraw loan or line of credit, and none of those labels decides the tax result. Tax law follows the money — interest on funds borrowed to buy a private car or fund a family holiday is not deductible even where the money came out of a loan named after the rental property.

What is the difference between an offset account and a redraw for tax purposes?

An offset account is usually a separate account linked to the loan; money held in it reduces the interest charged, and drawing from the offset may not be the same as redrawing from the loan. A redraw is money taken back out of the loan after extra repayments, and is treated as new borrowing whose purpose must be tested. The distinction matters greatly if a home later becomes a rental property — get advice before moving large amounts between loans, redraw and offset accounts.

What if the property was only rented for part of the year?

The interest may need to be apportioned. This applies where you bought the property part-way through the year, where it became available for rent part-way through, where it stopped being rented or was sold, where it changed between private and rental use, or where it was used as a holiday home for part of the year. If you lived in the property until 30 September and it became available for rent from 1 October, the private-period and rental-period interest must be separated.

How is loan interest split on a co-owned rental property?

Interest is usually claimed according to the ownership share and the actual borrowing arrangements, following the legal ownership split — 50/50, 70/30, tenants in common or joint tenants. Loan responsibility and payment arrangements should also be checked. Do not allocate the deduction to the higher-income owner simply because it produces a better result.

What records do I need to support a rental loan interest claim?
Keep the annual loan interest summary, bank loan statements, the loan contract, settlement statement, refinance documents, redraw records and evidence of how redraws were used, offset account records, invoices for rental works funded by the loan, records of loan splits and ownership percentage, and records showing when the property was first rented, when it was available for rent, and any private-use periods.

 

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About the Author

Written by Mark Walmsley, Chartered Accountant and Registered Tax Agent.

GoTax helps Australians complete their tax returns online, with returns checked by registered tax agents before lodgement.

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General Information Disclaimer

This article provides general information only and does not take into account your personal circumstances. Tax law can change and rental loan interest deductibility depends on loan purpose, property use, rental availability, refinancing, redraws, private use, ownership and records. If you are unsure, seek advice from a registered tax agent.