Rental Property Interest Deductions (Australia 2025-26)
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Primary tax-year context: 2025-26
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General information only. Speak with a registered tax agent for advice.
Interest on your rental property loan is usually your largest single deduction — often worth more each year than depreciation, rates, and insurance combined. Getting it right means understanding the purpose test, what happens when you redraw, and how to handle loan establishment costs. Get it wrong and the ATO can disallow part or all of your claim.
The purpose test: it’s the loan use, not the security
The ATO’s rule is straightforward: interest is deductible if the borrowed money is used to produce assessable income. What matters is why you borrowed the money, not what you used as security.
This means:
- You borrow $500,000 against your home to purchase a rental property — the interest is deductible, even though your home is the security.
- You borrow $500,000 against the rental property to fund a holiday — the interest is not deductible, because the money was used for private purposes.
Loans used to purchase the property, renovate it, carry out repairs, or cover acquisition costs (stamp duty, legal fees, building inspection) are all deductible. The stamp duty and legal fees are part of acquiring the income-producing asset, so the interest on that portion of the loan is fully deductible.
Redrawing from your loan
This is where many investors trip up. If you have a variable or offset loan and you redraw funds for private use — a car, a holiday, a kitchen renovation on your home — the interest on that redrawn amount stops being deductible from the day of the redraw.
You need to track the split and apportion your interest accordingly. Most lenders can provide a loan statement showing the balance attributable to the rental property versus private redraws, but the responsibility for the calculation sits with you.
Refinancing
If you refinance your rental property loan, the interest on the new loan remains deductible as long as the purpose of the borrowing hasn’t changed. Refinancing to get a lower rate does not break deductibility.
If you roll in additional borrowings for private purposes at the same time, you’ll need to apportion from that point forward.
Break costs on fixed-rate loans: If you exit a fixed loan early and incur a break fee, that cost is deductible. If the break fee is under $100, you can claim it in full in the year you pay it. If it’s $100 or more, it’s treated as a borrowing cost and spread over the remaining fixed term or 5 years, whichever is less.
Interest paid in advance
Some investors pre-pay 12 months of interest before 30 June to accelerate their deduction into the current tax year. The ATO allows this under the prepaid expense rules, but only if the prepayment period does not extend more than 12 months beyond the payment date. If you pay on 1 June 2026 for interest covering 1 June 2026 to 31 May 2027, the deduction falls in 2025-26. If the period is longer than 12 months, you can only claim the portion that falls in the current year.
Loan establishment fees and borrowing costs
The one-off costs of setting up your loan — application fees, mortgage registration fees, title search fees, lenders mortgage insurance (LMI) — are deductible, but spread over the lesser of the loan term or 5 years. If you repay the loan early, you can claim the remaining amount in the year of repayment.
If your total borrowing costs are $100 or less, you can claim the full amount in the year of borrowing.
Deductibility by scenario
| Loan scenario | Deductible? | Notes |
|---|---|---|
| Loan to purchase rental property | Yes, 100% | Includes deposit portion |
| Loan to fund stamp duty and legal fees | Yes, 100% | Part of acquiring the asset |
| Loan to renovate rental property | Yes, 100% | Must be rental-use renovation |
| Loan to purchase a car (secured by rental property) | No | Private purpose |
| Loan with partial redraw for private use | Apportioned | Deductible on rental-purpose balance only |
| Refinanced loan (no change in purpose) | Yes, 100% | New lender, same purpose |
| Prepaid interest (up to 12 months) | Yes, in full | Must not exceed 12-month prepayment rule |
| LMI and loan establishment fees | Yes, spread over 5 years | Or loan term if shorter |
Worked example: partial redraw
You have a $500,000 investment loan at 6.5% per annum. Annual interest: $32,500.
Partway through the year you redraw $50,000 to buy a car. Your loan balance is now $550,000, but only $500,000 relates to the rental property.
Deductible portion: $500,000 / $550,000 = 90.9%
Deductible interest: $32,500 × 90.9% = $29,545
The $2,955 attributable to the car is a private expense and cannot be claimed. If your marginal tax rate is 37%, the difference in tax is about $1,093 per year — every year the car loan remains outstanding.
Common mistakes
Claiming interest on a loan used for private purposes. The ATO regularly audits rental income and expense claims. If your loan records show a large redraw and you’re claiming 100% of the interest, expect a query.
Not tracking redraws. If you have an offset or redraw facility and use it for both personal and rental purposes, you need to keep a running record of which withdrawals were for what purpose. Without this, the ATO can disallow the entire claim.
Claiming establishment fees in year one. Borrowing costs over $100 must be spread. Claiming them all in year one is a common error.
Missing the prepayment rules. Prepaying more than 12 months of interest does not accelerate the deduction — you can only claim the year-one portion.
Key takeaways
- Interest is deductible based on the purpose of the borrowing, not the security.
- Redraws for private use reduce your deductible portion from day one.
- Refinancing does not break deductibility if the purpose is unchanged.
- Borrowing costs over $100 are spread over 5 years (or loan term).
- Keep loan statements and a record of all redraws with their purpose.
ATO sources
Next step
- Forecast after-tax outcomes with the Investment Property Calculator
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