Can you tax deduct mortgage payments on a rental property?

If you’re planning to buy an investment property, you’ve probably heard about a range of tax deductions that you can claim. This is why it can be so advantageous to invest in property: not only can you increase your cash flow, but you are also eligible for a number of tax benefits.

Is your rental property mortgage payment tax deductible?

Not exactly. While you can’t deduct the principal portion of your investment property mortgage payment, you can deduct the interest that accumulates on top of the loan. You can also deduct any mortgage-related expenses, such as account and maintenance fees.

Interest is a significant long term expense, so it’s reassuring that it will be balanced out with tax deductions. Let’s take a look at an example:

If you took out a 25 year $500,000 home loan at a 2.9% interest rate, your interest paid will total to around $200,000.

While the interest is a tax deduction, assuming you keep the property as a rental for the entire loan term, it’s not ‘free money’. Always try to secure as low an interest rate as possible — taking into account fees and loan suitability to your lifestyle.

Using the previous example, you’d pay almost $30,000 less in total interest if you had a rate of 2.5%.

Try out our repayment calculator to see how much you could save with a lower interest rate:

Interest only home loans

Things are a little bit different if you opt for an interest only home loan. With an interest only mortgage, you only pay off the interest that accrues on top of the loan amount. Therefore, while on this type of loan, your repayments are totally tax deductible.

Bear in mind that interest only loans are short term, and you’ll typically be required to switch to paying both the principal (loan amount) and interest at the end of the 1-5 year interest only period. This will result in a sharp increase in your repayment amount, and you won’t be able to deduct the full repayment amount — just the interest.

Whether an interest only home loan is a good move for you depends on your investment goals. One benefit to making interest only payments is that you have increased cash flow to spend on other investments.

Many investors use the interest only strategy to purchase in a high growth area and sell the property once its value has increased, before the end of the interest only period. This provides them with a capital gain that didn’t require them to actually pay off the loan.

• Related: Are you ready to pay more when your interest only period ends?

Negatively geared rental properties

Negative gearing refers to when your rental income is lower than your property expenses, including your mortgage repayments. This results in losses that can be deducted from your taxable income.

Investors will often choose to negatively gear their rental property to maximise their tax deductions. These short term losses will usually be offset by the capital gain received once the property is sold. Any profit made by selling will attract the capital gains tax, but this can be minimised.

However, negative gearing is not the way to go if you want to make money through a regular, passive income.

What other borrowing expenses can be claimed?

There are a number of expenses related to your home loan that can also be claimed as tax deductions. These include:

• Loan maintenance fees
• Fees for features such as an offset account
• Loan establishment fees
• Lenders Mortgage Insurance (LMI), once it has been paid
• Any mortgage broker fees, although most brokers will not charge borrowers
• Stamp duty costs

These aren’t all the tax deductions you can make. As a property investor, you have access to many different potential deductions. For more information, check out our article outlining what you can claim on an investment property.

Before making tax deduction claims, it’s smart to check for any ATO changes. To make sure you are covered, it’s a good idea to speak to a tax accountant who specialises in investment property tax.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.