The basic idea behind interest deductibility is that if you own a rental property with a mortgage, you can deduct the interest you pay on that mortgage from the income you receive as rent when determining your taxable income.
In 2021, rules were put in place that meant:
You could no longer claim a deduction for interest on your rental property if you purchased it on or after 27 March 2021
Your ability to claim interest deduction for rental property purchased before 27 March 2021 was being phased out.
There were some exceptions to this, such as if the property was a new-build.
Changes to interest deductibility rules
Interest deductibility has been restored, which means you can now claim interest as an expense for any residential investment property you own, irrespective of when the rental property was purchased or when the loan was drawn down.
The changes are happening in two phases:
From 1 April 2024, you can claim a deduction for 80% of the interest on funds borrowed for the residential property
From 1 April 2025, you’ll be able to claim 100% of the interest deduction instead of 80%.
How interest deductibility works
Tax calculations can be complex and affect investors differently. The savings from these tax changes may differ, as tax rules vary according to property type, date of purchase and who is renting the property.
Examples of deducting home loan interest costs
Here are two scenarios for an investment property with:
A $650,000 home loan with a 30-year loan term
A 7.24% p.a. one-year fixed interest rate
Principal and interest repayments.
We’ve used the 33% income tax rate in these scenarios.
House bought in October 2021
As this purchase occurred after interest deductibility was removed, it’ll be the first time the property investor can claim a tax deduction for interest costs:
The property investor can now get an 80% tax deduction on interest costs to offset their taxable rental income for 1 April 2024 to 31 March 2025
This could save the property investor approximately $12,245 in tax in the first year alone – that's $235 per week.
House bought in February 2021
As this purchase occurred just before the tax changes in 2021, the property investor would've been operating under a slightly different set of tax rules:
For the tax year ending 31 March 2024, the property investor could deduct 50% of their interest costs when calculating their tax
For 1 April 2024 to 31 March 2025, this deduction has increased to 80%
The property investor could save an additional amount of approximately $4,514 in the tax year ending 31 March 2025 – that’s $87 per week.
The property investor won't save as much on tax because they weren’t paying as much tax to begin with.
Excerpt: ANZ
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