Tax and Rental Interest | 2023 Gotax

Refinincing Rental Property Loans can impact your Tax Deductions

When it comes to rental properties and the tax deductibility of interest and finance expenses within the context of refinancing the rental property, there are some misconceptions on the deductibility of the interest. The key factor in determining whether the interest expense incurred on a loan is tax-deductible is the purpose for which the loan was used.

Let’s say you have a rental property that you originally purchased with a mortgage loan.

The interest expense on this loan would be tax-deductible because it was used to acquire an income-producing asset. Now, let’s say you decide to refinance this mortgage loan with a new loan. If you use the proceeds from the new loan to repay the original mortgage loan, then the interest expense on the new loan would also be tax-deductible because it is directly linked to the acquisition of an income-producing asset.

However, if you use the proceeds (or some of the proceeds) from the new loan for other purposes, such as to purchase a new car or to pay off credit card debt, then the interest expense on that portion of the new loan would not be tax-deductible because it is not directly linked to the acquisition of an income-producing asset.

A common rental example:

Let’s say you have a rental property that you originally purchased with a mortgage loan. You decide to refinance this mortgage loan in full and use the proceeds from the new loan to buy a home in which you will be living as an owner-occupant. In this case, even though you have used the proceeds from the new loan to repay the original mortgage loan, the interest expense on the new loan would not be tax-deductible because it is not directly linked to an income-producing asset. Instead, it is being used for personal purposes (i.e., to purchase a home for personal use).

When refinancing a rental property, it is important to consider how you will use the proceeds from the new loan. If you use the proceeds to repay an existing mortgage loan or to acquire another income-producing asset, then the interest expense on the new loan will be tax-deductible. However, if you use the proceeds for other purposes, such as to purchase a home for personal use or to pay off personal debts, then the interest expense on that portion of the new loan will not be tax-deductible.

Gotax has all the facts on your rental income tax return.  Visit those that know all about rental properties at gotax.com.au.