Interest – When is it deductible

Interest – When is it deductible

For most geared investors, interest is generally the largest deductible claimed against rental income so it demands attention.

Solutions that offer a faster reduction of a home loan balance while maximising deductions of interest on rental investments should be carefully scrutinised. ‘Split’ loans in their various forms generally mean interest on the investment loan is capitalised, while all income, including rent, is directed towards reducing the home loan with its nondeductible interest expense. This type of arrangement is considered tax avoidance in its extreme forms. Interest on the capitalised interest is not deductible. Given the attitude of the Australian Taxation Office (ATO) it is recommended that rental income be deposited into the rental investment loan account to cover the interest expense. When rent is less than interest and other expenses, using another loan, including a line of credit, is practical.

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