The ATO has flagged that rental owners get their returns wrong often. Its 2023 tax time release reports 9 in 10 rental owners making errors, though those errors cover more than interest.
This guide covers owner-occupied homes, rental properties, co-borrowers, business use, redraws, refinancing and the records you need. Tax rules change, so check complex situations against current ATO guidance.
Key Takeaways
- Owning a property alone does not make private home loan interest deductible.
- Deductibility applies when funds buy, maintain or improve an income-producing asset.
- Mixed private and investment use usually means apportioning the interest.
- Keep loan statements, contracts and proof of how the funds were used.
What Is a Mortgage Interest Deduction in Australia?
What an interest deduction means
A deduction reduces your taxable income when the expense has a sufficient connection with earning that income. It is not a tax offset. An offset reduces the tax payable directly, while a deduction only lowers the income on which tax is calculated.
How mortgage interest differs from principal repayments
Interest is the lender's charge for providing finance. Principal repayments reduce what you owe. Only interest can be potentially deductible, and only to the extent the borrowing is income-producing. Principal repayments are not deductible.
That is why your loan statements and tax records must separate the two, along with fees and penalties.
Why the borrowing's purpose matters
The ATO looks at the use of the funds, not the asset securing the loan. Under TR 95/25, using a rental property as security does not make interest deductible if the money was spent privately. Section 8-1 of the ITAA 1997 also excludes private and domestic expenditure.
Who Can Deduct Mortgage Interest?
Individual property owners
An individual generally needs to be legally liable for the loan, and the funds must be used to earn assessable income. Paying someone else's loan does not create an entitlement on its own.
Co-owners and joint borrowers
Deductions generally follow legal ownership. Joint tenants hold equal interests, while tenants in common may hold unequal ones. Private agreements to split interest differently don't override this.
There are exceptions. The ATO's rental guidance gives the example of Simone, who owns a rental alone while her husband Jarrod is a co-borrower because the bank required it. Her agreement makes her liable for all repayments and interest, so she can claim 100%. Joint borrowing alone doesn't mean an equal split.
Co-owners should keep:
- Ownership percentages and title documents
- Rental income allocations
- Records of who paid which interest, and why
Rental property owners
Owners of residential or commercial rentals may claim interest on borrowing to acquire, hold or improve the property. The property must be rented or genuinely available for rent.
Businesses, companies, trusts and partnerships
The entity that incurred the expense generally claims it, and only where the funds served its own income-producing activity. The claim location differs:
- Sole traders: the business schedule of the individual return
- Partnerships, companies and trusts: their own returns
Mixed business and private costs need apportioning.
Non-residents and cross-border owners
Foreign residents with Australian rent must lodge an Australian return and hold a TFN. Residency alone doesn't decide deductibility; the income-producing rules still apply.
Overseas lenders can also trigger withholding obligations (generally 10% on interest, subject to treaties). For cross-border ownership, including NRIs, seek specialist advice.
When Is Mortgage Interest Deductible?
Investment or rental property loans
Interest is deductible to the extent the funds were used to acquire, maintain or improve an income-producing property. Interest on private spending is not deductible.
Loans secured against a different property
Interest on a loan secured against your home can still be deductible if you used the funds to buy an investment property. The reverse also applies: interest on a loan secured on a rental is private borrowing when the funds were used for a holiday or a car.
Changes in use and rental periods
Your deductible share can shift over time:
- Rented or genuinely available: deductible. Realistic rent and broad advertising matter, and above-market rent or private reservations can undermine availability.
- Repairs or renovation: interest can continue where an existing rental is temporarily uninhabitable.
- Private use or owner-occupied periods: apportion the interest or deny the deduction.
- Vacant land: holding costs, including acquisition interest, can be denied from 1 July 2019.
Holiday homes have a newer rule. Final TR 2026/1, issued 20 May 2026, requires a holiday home to be used or held mainly for rental income. Advertising alone is not enough.
Business and investment use
Interest on funds applied to a business or other income-producing activity can qualify, depending on the taxpayer and how the funds were used.
Costs not to confuse with interest
- Principal repayments: not deductible
- Initial repairs and improvements: not deductible as repairs
- Borrowing costs: spread over 5 years or the loan term, whichever is shorter (immediate if $100 or less)
- Private living costs: not deductible
How Do Mixed-Use Loans, Redraws and Refinancing Affect the Deduction?
Mixed-purpose loans
When one loan funds both private and income-producing assets, you must apportion the interest. In the ATO's Yoko example, a $400,000 loan funds a $380,000 rental and a $20,000 car. Of $35,000 interest, the ATO allows $33,250.
Redraws, offsets and extra borrowing
A redraw is new borrowing, and its interest follows how the redrawn funds are used. Pulling cash for a holiday doesn't inherit the investment label. Track every withdrawal.
Offset accounts differ: only the reduced interest actually incurred is deductible.
Refinancing and loan splitting
Refinancing does not make interest deductible, and it does not shield new private borrowing. Trace the original debt, identify any extra funds, and keep separate splits for private and investment portions where you can.
Apportionment over time
Ordinary repayments generally reduce the private and income portions proportionately, not private debt first. Keep a running calculation backed by lender statements.
The High Court's 2004 decision in the Hart case shows the risk of structuring repayments to clear private debt while investment interest compounds. That outcome turned on the specific arrangement before the court, not on every loan split.
Common tracing mistakes
- Relying on the loan's name, the lender's description or the security
- Mixing personal and investment money in one account
- Paying personal expenses from an investment loan
- Treating intention as enough without evidence of actual use
How to Claim and Document Mortgage Interest
Identify the correct interest amount
Use your annual loan statements to:
- Separate interest from principal, fees and penalties
- Identify any private-use portion before you claim
Assemble evidence of the loan's purpose
- Loan contract and settlement documents
- Bank, redraw and refinance records
- Rental agreements and property manager statements
- Ownership records
- Evidence of business or investment use
The ATO recommends keeping records generally for 5 years, with the start date depending on your circumstances.
Report accurately and get help
The right return and schedule depend on whether the property is held personally, jointly, or through a business, trust or company.
VJM Global supports Australian businesses, investors and cross-border clients with accounting, tax compliance and financial reporting, and has served 250+ Australian businesses. We can't promise eligibility or tax savings, but we can help you document your position.
Frequently Asked Questions
Can I deduct interest on my taxes?
You can generally deduct interest only where the borrowing connects to assessable income. Interest on a private home loan isn't deductible merely because it's a mortgage.
Is there a limit on interest expense deductions?
Section 8-1 sets no fixed-dollar mortgage cap, but deductions depend on income-producing use, apportionment and ownership. Business and international borrowers can face thin capitalisation limits.
What is an interest deduction?
An allowable interest expense reduces assessable income. A tax offset instead reduces the tax payable directly.
Is interest income 100% taxable?
Bank interest is generally assessable income, though treatment can vary by taxpayer and account. It differs from deductible interest expense. Missing TFN details can trigger withholding.
Can I deduct interest on an investment property loan?
Yes, to the extent the funds were used for an income-producing property, with any private use apportioned.
Can I claim mortgage interest if the loan is in joint names?
It depends on legal liability, ownership, income allocation and actual use of the funds. Seek professional review where the payment split differs from the ownership split.
