14 Aug 2025
The investment you make in purchasing a home is often one of the biggest expenses you will ever have. However, did you know that owning a home can also come with some tax benefits? One potential benefit is being able to claim your home loan interest on your taxes (but that’s only true in certain situations). It all depends on how the property is used.
The Australian Taxation Office (ATO) has clear rules around this, and claiming incorrectly can lead to many problems and even penalties. This guide will help you understand when you can claim, when you can’t, and how to stay on the right side of the ATO.
The first thing to consider is whether your property earns income. This is what determines if you can claim loan interest.
If you live in your property, the interest you pay on your home loan is generally not tax-deductible. This applies to owner-occupied homes, even if it’s your first home or you are under financial stress. Simply put, you can’t claim deductions for something private or personal.
If you use your property to earn income, like renting it out, the loan interest is deductible. This allows you to claim the interest as a tax deduction. These deductions can significantly reduce the amount of tax you owe each year.
Someone takes out a home loan to buy a unit they rent to tenants. The interest cost on that loan is deductible because the property is income-producing.
You should understand which category your property falls into. But even with investment properties, there are conditions to follow. Let's explore this further.
An investment property offers attractive tax benefits, including the ability to claim loan-related expenses.
If your property is rented out or available for rent, expenses associated with borrowing money for that property can be claimed, such as:
It is equally important to understand what you cannot claim:
Some properties have mixed uses. When part of the property is used to make money and another part is personal, there are special rules about what can and can’t be claimed.
If you are renting out part of your home, such as a spare room or through platforms like Airbnb, you could claim part of the interest. Claims are generally based on the percentage of the property used to generate income.
A person turns their spare bedroom into an Airbnb rental. And since the room accounts for 20% of their home's floor space, they might be eligible to claim 20% of the interest paid on their loan.
If part of your home is set aside for a business or home office, a similar rule applies. You may claim a percentage of the interest costs based on the area used for the business.
If part of your property is used to make money, you need to figure out how much of your loan interest is for that part. This is called apportionment. For that, you need to keep clear and accurate records to meet ATO rules.
Here’s where things get a bit tricky. You need to keep in mind the following:
If you refinance a loan on an investment property, the new loan's tax deductibility depends on how you use the funds. If it’s solely for maintaining your investment property, the interest is deductible. However, if you mix in personal expenses, only the business portion can be claimed.
With redrawing facilities, the purpose of the withdrawn funds matters. If used for private spending like a holiday, any interest on the redrawn amount is not deductible.
You can maintain separate loan accounts for personal and investment use to avoid confusion. Also, mixing purposes in the same account can create compliance issues at tax time.
Compliance with ATO rules is non-negotiable. Here are some tips to ensure your claims hold up:
Maintain loan statements, receipts, and any documents showing how borrowed funds are used. These will serve as evidence if your claims are audited.
If possible, avoid mixing personal and property-related loans. This simplifies calculations and prevents errors.
Tax laws can be intricate, so consulting a tax agent or accountant ensures you don’t miss any opportunities or fall foul of the rules.
Now, it may be a crystal clear thing that you can deduct home loan interest, but only if the property is used to earn income, like a rental. You should keep records clear and organised. And when you get a bit confused, ask a tax professional for help.
And remember: the ATO looks closely at these claims. So, it’s always better to be accurate than overly optimistic.
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