Can You Claim Interest on a Rental Property Loan?

General information only. This article provides general information on rental property record-keeping and tax. It is not tax, legal or financial advice. Interest deductibility on mixed, redrawn or refinanced loans depends on your specific facts, so confirm your position with a registered tax agent. Based on Australian Taxation Office (ATO) guidance current at the time of writing.

Short answer: yes, you can generally claim the interest on a loan used to buy a rental property, but only to the extent the borrowed money is actually producing rental income, and only while the property is rented or genuinely available for rent. That "to the extent" is where most investors come unstuck, because the moment any part of the loan is used for something private, the deduction has to be apportioned, and that apportionment follows the loan for the rest of its life.

This guide explains when rental loan interest is deductible, the redraw, refinance and offset traps that catch people, and the records that keep your claim defensible. For the full list of rental deductions, see Rental Property Tax Deductions: What You Can Claim in Australia.

The general rule

If you borrow to buy a rental property and it's rented or genuinely available for rent for the whole income year, you can generally claim a deduction for the interest charged on that loan. If the property is only available for part of the year, or only part of the loan relates to the property, you claim only that portion.

One subtlety worth knowing: you can't claim a deduction for extra payments that reduce the principal, only the interest is deductible.

What you can borrow for and still claim the interest

The interest is deductible when the borrowed money is used for genuinely income-producing purposes connected to the rental. According to the ATO, that includes borrowing to:

• Buy the rental property itself
• Buy a depreciating asset for it (for example, a new air conditioner)
• Pay for deductible expenses, such as repairs that arise from renting it out
• Finance renovations or extensions to the property

You can also claim interest you pre-pay up to 12 months in advance, and interest that keeps accruing while the property is temporarily uninhabitable because you're repairing damage.

The rule that catches everyone: purpose, not security

Here's the single most misunderstood point. Deductibility depends on what the borrowed money is used for, not on what asset secures the loan.

The ATO's own example: a couple take out a loan to buy a new home and secure it against their existing property, which they now rent out. Even though the loan is secured against the rental, they can't claim the interest, because the borrowed money was used to buy their private home, not to produce income. (They can, separately, claim the interest on the small remaining mortgage on the rented property, because that debt does relate to the income-producing asset.)

So before assuming interest is deductible because "it's against the investment property", ask the only question that matters: what was the borrowed money actually spent on?

Mixed-purpose loans: apportion for the life of the loan

If you use part of a loan for the rental and part for something private, only the rental portion of the interest is deductible. The ATO example: borrow $400,000, use $380,000 for the rental and $20,000 for a private car, and you can claim 95% of the interest ($380,000 / $400,000).

The part people miss: that 95/5 ratio then applies for the life of the loan, to both interest and principal repayments. You can't simply pay off the private $20,000 slice and restore a 100% deduction, every repayment is treated as reducing both portions proportionally. This is why mixing private spending into an investment loan is so costly, and why the cleanest structure is to keep investment and private borrowings completely separate.

Redraws: a redraw is new borrowing

A redraw facility lets you pull back extra repayments you've made. For tax, redrawing is treated as fresh borrowing, and the deductibility depends on what you use the redrawn money for.

The ATO example: an investor is ahead on repayments and redraws $9,500 to buy a TV and a lounge. That $9,500 is now a private borrowing, so the interest on it isn't deductible, and the loan becomes mixed-purpose, to be apportioned for the rest of its life. Redraw for a deductible rental purpose (a repair, a new appliance for the property) and the interest stays deductible; redraw for anything private and you've just created an apportionment problem.

The practical defence: record the purpose of every redraw at the time you make it. Reconstructing it years later, under review, is exactly the situation you want to avoid.

Offset accounts are different from redraws

An offset account is not a redraw, and the distinction matters. Money sitting in an offset account is your own savings. It reduces the interest you're charged (because the balance offsets the loan), but it doesn't change the amount you've borrowed or what it was used for. Spending money out of your offset account is spending your own savings, it doesn't make your loan mixed-purpose the way a redraw can.

This is why, if you might later want to pull money out for private use, keeping spare cash in an offset account generally preserves your deduction better than parking it in the loan and redrawing it. (Confirm the right structure for your circumstances with your adviser.)

Joint loans and joint ownership

Where a property is jointly owned, each owner generally claims interest in line with their legal ownership share: joint tenants split it equally, tenants in common in proportion to their interests. There are particular situations (for example, a co-borrower who isn't an owner) where a documented agreement determines who claims what, so get advice if your loan and title don't line up.

Records to keep

To support an interest claim, keep:

• Your annual loan interest statement
• A note of the purpose of every redraw, refinance or sub-account, recorded at the time
• The apportionment ratio for any mixed-purpose loan, and evidence of how you calculated it
• Records that show the property was rented or genuinely available for rent in the period claimed

This is one of the areas the ATO reviews most often, so the contemporaneous note on each redraw is worth far more than memory. ledger.rent gives you a place to record loan interest against each property, capture the purpose and split of any redraw or refinance as it happens, and carry the apportionment forward year to year, so a mixed-purpose loan is easy to explain rather than a tax-time scramble. It doesn't give advice, it keeps the evidence your registered tax agent needs.

Keep your loan interest defensible

The deduction is generous, but it lives or dies on records, especially once a loan has been redrawn or refinanced. ledger.rent helps Australian investors log loan interest per property, capture the purpose and split of every redraw, and export an accountant-ready summary so a mixed-purpose loan is simple to explain.

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