Interest on money borrowed to buy a rental property can be claimed when the property is rented, or held to produce income, for the whole income year; for only part of the year, a portion can be claimed. Borrowing expenses, the costs of taking out the loan, are claimed over 5 years or over the term of the loan if that is shorter, unless they come to $100 or less, in which case the whole amount is deductible in the year it is incurred.
General informationThe ATO’s rules on loan costs in plain words, not tax or financial advice about any loan. The ATO’s pages on interest expenses and borrowing expenses are the place to check, and a registered tax agent can advise on a particular return. Figures in the examples are illustrative.
What the interest can be claimed on
The ATO allows a deduction for interest on the loan principal used to:
- buy a rental property
- pay for deductible expenses, such as repairs needed because the property has been rented out.
It also allows interest prepaid up to 12 months ahead, and interest for the time the property can’t be lived in while damage to it is being repaired.
Where the deduction stops
The ATO says interest can’t be deducted:
- for any period the property is used privately, however short
- on a loan used to buy a new home that doesn’t produce income, even when the rental property is the security for it
- on a loan for a holiday home, unless the home is used, or held for use, mainly to produce rent.
Extra payments made to reduce the principal are not deductible either: only the interest is.
One loan, two purposes
A loan account can end up paying for the rental and for private things at once. When it does, the interest is apportioned: the part on money used for private purposes, such as school fees or a holiday, can’t be claimed. The owner keeps records accurate enough to separate the interest on the rental part from the interest on the private part.
The rule that surprises people is about repayments. An owner can’t choose to pay off only the private part of the loan: every repayment is apportioned across the rental and private portions for as long as the loan runs.
Illustrative example, not a real caseA rental loan stands at $400,000. The owner redraws $30,000 from it to buy a car, so the balance becomes $430,000, of which $30,000 is private.
- Private share of the balance: $30,000 ÷ $430,000 = about 7%.
- At an assumed interest rate of 6% a year, interest on the private $30,000 comes to about $1,800 a year, and that part can’t be claimed.
- A later lump-sum repayment of $30,000 does not clear the private part first. Under the ATO’s rule it is spread across both portions.
Borrowing expenses, item by item
Borrowing expenses are the costs of taking out a loan to buy the property. The ATO sorts them like this.
| Cost | A borrowing expense? |
|---|---|
| Loan establishment fees | Yes. |
| Lender’s mortgage insurance, taken out by the lender and billed to the borrower | Yes. |
| Preparing and filing mortgage documents, including solicitors’ fees | Yes. |
| Mortgage broker fees | Yes. |
| Interest | No: it is claimed on its own, as above. |
| State or territory stamp duty on transferring the title | No: it is a capital expense. |
| Solicitors’ and conveyancers’ fees for buying the property | No: also a capital expense. |
Capital expenses like these are not lost: they may go into the property’s cost base, which can reduce the capital gains tax when it is sold. The guide to selling a rental covers the cost base.
Spreading them over five years
Borrowing expenses are generally claimed over the first 5 years of owning the rental. If the loan started part way through an income year, the first claim is adjusted for the number of days the loan was held in that year. The ATO’s worked example counts the days from the loan date to 30 June, divides them by the days in the whole five-year period, and applies that fraction to the total.
Illustrative example, not a real caseA 30-year loan starts on 1 February 2026, with $3,000 of borrowing expenses: a $600 establishment fee and $2,400 of lender’s mortgage insurance.
Days from 1 February to 30 June 2026: 150.
Days in the five years from 1 February 2026 to 31 January 2031 (one of them a leap day): 1,826.
First-year claim: 150 ÷ 1,826 × $3,000 = $246.44.
The rest is claimed across the following years by the ATO’s same days-based steps, until the five years run out.
If the rental is also a holiday home, borrowing expenses count as an ownership expense, deductible only if the property is used, or held for use, mainly to produce rent.
The interest, and the 1 July 2027 change
Interest remains a cost of earning rent. What the reform changes is where a loss can go once the costs outrun the rent.
The rule today
When deductible expenses, including the interest, exceed the rent, the owner can claim the rental deductions against rental and other income, such as salary, wages or business income.
From 1 July 2027
For an established residential investment property bought from 7:30pm AEST on 12 May 2026, losses can be deducted only against other income from residential properties, including capital gains. Excess losses carry forward to offset residential property income in later years. New builds can still be negatively geared.
The guide to rental losses and negative gearing sets out the change by purchase date.