Refinancing Your Home Loan: Tax Deductions

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When tax time comes, property owners need to go over their financial activity for the year with a fine-tooth-comb.

If checklists, statements and receipts are the hunting ground, then verifiable tax deductions are the prize. The stakes are high because the investor with the most tax deductions wins the biggest (or most favourable) tax return.

Inevitably there are numerous questions that pop up in the area of tax deductions, and one of the greyer areas is the topic of refinancing. We spoke to property tax expert, Shukri Barbara, of Property Tax Specialists to help us get our facts straight.

  • The following article contains general advice only and does not take into account your specific financial situation.

Shukri Barbara

  • Shukri Barbara is the Principal Adviser at Property Tax Specialists.
  • Shukri is a CPA and has more than 30 years of experience.
  • He provides advice and assistance in a wide variety of property tax matters, including capital gains tax.

Who is eligible for tax deductions on their property and what are they?

According to Mr Barbara, 'The basic rule of the tax law is that tax deductions are only eligible on assets that are earning an income. Your main residence does not generate an income and therefore, no tax deductions are available on the interest or expenses associated with maintaining that property. For an investment property, however, you are charging rent and therefore generating income. This income is assessed and as a result many expenses are tax deductible.'

Tax deductions that property investors can claim are divided into two categories: those that can be claimed immediately and those that can be claimed over a number of years.

Items that can be claimed immediately include, but are not limited to, property management and maintenance expenses, rates and taxes, repairs and maintenance, interest and loan account-keeping fees and administration expenses.

Items that are deductible over a number of years include borrowing expenses (over five years) and the depreciation on the building construction and the value of particular assets.

What tax deductions are available as a result of refinancing specifically?

When people refinance they are essentially terminating one loan and starting another. The costs involved in setting up a loan and exiting it are tax-deductible when it’s for an investment property, Barbara says.

There are two main areas of tax deductions that can be claimed when you are refinancing; the initial borrowing costs and/or the exit fees and penalties.

Barbara explains, "When an investor initially buys a property, they have a number of borrowing expenses that they have to pay. While they are much less than in previous years, the amount depends on the type of loan (whether it’s a low doc or no doc) and includes loan application fees, legal fees, lenders mortgage insurance, stamp duty and loan registration costs. During the first five years of that property ownership, investors can claim those borrowing expenses back incrementally. If they sell the property or refinance it within those first five years, the investment property owner can claim the remaining tax deductions straight away."

Case Studies

  • Tom chose to refinance his investment property three years after buying it because he wanted to change banks and get a more competitive interest rate. As a result, he can claim the remaining tax deductions on the borrowing costs that he would have realised in year four and five.
  • Cathy has owned an investment property with a fixed rate loan for two years. She has hit a tight financial spot and needs to refinance. Because Cathy is terminating her mortgage within the set fixed interest rate period, she has to pay a penalty to her bank. All exit fees and penalties that Cathy has to pay are considered a tax deduction.

A closer look at some refinancing situations:

People refinance for many different reasons and in all sorts of ways. These are a few of the refinancing circumstances, and their resulting tax considerations.

1. Straight refinance

This form of refinancing is primarily based around accessing lower interest rates. The case studies of Tom and Cathy above refer to this type of refinancing. The tax deductions available are the remaining borrowing costs that were spread over five years and the exit fees and penalties that result from a fixed rate loan.

2. Using equity from your main residence to buy an investment property.

Many people look to refinance their main residence home loan in order to access their equity and invest in a rental property. This is done with the aim of generating wealth. "In this case, interest will be deductible because the loan principal was applied to acquire income-generating property," says Barbara.

3. Turning the main residence into an investment property and buying a new family home.

In some cases, people have paid off their main residence and are ready to move on, but choose to rent the property out instead of selling it. In order to afford their new family home, they access equity from their paid-off home. In this case, there is no tax benefit because the now-rental property is already paid off and the interest on the equity amount is not going towards an income-producing asset.

How can investors maximise tax deductions on interest?

Shukri Barbara has this important warning for anyone looking at a new home loan: "Investors need to be mindful of how they structure their mortgage in the first place — even for their principal place of residence." His advice? "Use an offset account."

"An offset loan is based on two parts — the loan facility and the deposit account. It is best to maximise your loan and use the deposit account primarily," Barbara says. Instead of paying down the principal of the loan, keep the money in the deposit account. You cannot claim a tax deduction on repayments made towards the principal of an investment property loan — only the interest portion of repayments is tax deductible.

In the case of the third refinancing situation we investigated above, if the owner had used an offset account, the amount of the loan would not have changed and would not have been "paid off". When they went to purchase their new family home with the equity, the amount in the deposit side would have lowered and the loan would have started accruing interest again. This interest would have been a tax deduction.

Using an offset account can help because you don’t know what the future holds. As Barbara puts it, "The test of deductibility is how you apply the funds. In the simplest terms, if you apply the funds to an asset-generating account, the amount is deductible. If you put it on the principal amount and then redraw an amount that you have already paid off, it is not deductible."

How do investors claim tax deductions when refinancing?

In order to access all of the tax deductions that you are due as a property investor, it is important to maintain records and keep documentation of all bank statements and receipts. Barbara’s company, Property Tax Specialists, provides a checklist for their clients to make use of during the year to keep on top of what is important to keep, what to keep an eye out for and to remind you about what tax deductions are available.

In the case of refinancing, your bank will be able to provide you with a statement of costs that you can give to your accountant. If you are unsure about what tax deductions you are eligible for or want to ensure you maximise your return, Barbara advises using a property tax professional, 'We can work with you to structure your property investments to minimise tax, maximise your returns and protect your assets while keeping the ATO happy."

"At the end of the day," Mr Barbara cautions, "you have to remember why you became a property investor. It is for the economic benefit rather than the tax deductions; they are a just a bonus on the side."

Need more information about your property tax situation?

You can get into contact with Shukri to get advice regarding your property tax issues by filling out the form below.

Compare today's investment home loan refinance rates

Rates last updated November 25th, 2017
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.89%
3.91%
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Investors can take advantage of a discounted standard variable rate.
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5.29%
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Lock in the interest rate on your investment purchase for 3 years and enjoy the benefits of a package home loan.
4.19%
4.22%
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Access a fee-free offset account and a special interest rate for investors.
4.29%
4.05%
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This fixed rate investor loan has limited fees and flexible repayment options. 100% online application process.
4.24%
5.50%
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Get a competitive 3-year fixed rate to buy your next investment property.
3.99%
4.91%
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4.65%
4.69%
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Save on a no-frills home loan that offers a competitive rate without the bells and whistles.
4.79%
5.44%
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Package your 4-year fixed rate investment loan and pay no application fees.
3.98%
3.98%
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70%
A competitive investment loan with a low rate that requires a 30% deposit.
4.39%
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4.19%
5.37%
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$395 p.a.
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Plan ahead by locking in your rate for 3-years on this investor loan. $1,500 cash back available for refinancers. Conditions apply.
4.69%
4.71%
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80%
A Simplifier Home Loan with no application fee or ongoing fee.
5.59%
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$395 p.a.
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5.93%
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4.44%
5.53%
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$395 p.a.
90%
Enjoy a 2-year fixed rate with no establishment fees or annual credit card fees, all for an annual package fee of $395.
4.19%
5.47%
$0
$395 p.a.
95%
A competitive 2-year fixed rate to help you invest in property.
4.28%
4.59%
$0
$299 p.a.
80%
A competitive package rate for loans above $150,000. Optional offset account.
4.69%
5.00%
$0
$299 p.a.
80%
A loan with no application fee.
4.59%
5.37%
$0
$395 p.a.
95%
Enjoy the stability of an investment home loan rate locked in for 5 years.
4.54%
4.85%
$0
$299 p.a.
80%
A loan with no application fee and borrow up to 80% LVR.

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8 Responses

  1. Default Gravatar
    InvestorSeptember 29, 2017

    I have funds in my owner occupied loan which I want to redraw to purchase an investment property. Would this affect tax deductibility of the investment loan? My accountant has advised me to cross collateralise but are there any benefits to this if the investment loan interest paid are still fully tax deductible?

    • Staff
      JudithOctober 2, 2017Staff

      Hi,

      Thanks for contacting finder, a comparison website and general information service.

      The best thing to do with tax related questions is to speak to your accountant.

      Regards,
      Judith

  2. Default Gravatar
    KenJuly 26, 2015

    hello.

    if I refinance my investment property completely, the new loan is more than the initial loan amount, the excess amount is then to pay off my principal home loan. would the interest of this excess amount be tax deductible as part of the investment property interest? thanks

    Regards
    Ken

    • Staff
      JodieJuly 27, 2015Staff

      Hi Ken,

      Thank you for contacting finder.com.au, a financial comparison website.

      We are not tax specialists so I would recommend contacting one to get advice specific to your needs such as Shukri Barbara from Property Tax Specialists.

      However according to the ATO’s website you are not able to claim the interest on the portion of the loan you use for private or non-income producing purposes such as paying for a property that you will not use to produce income.

      Regards
      Jodie

  3. Default Gravatar
    RobMay 13, 2015

    Following a divorce settlement I borrowed money against the former matrimonial home to pay out the ex partner. The house was previously fully paid off. And will now be rented. Can I claim the interest as an expense to off set the rental income.

    • Staff
      JodieMay 28, 2015Staff

      Hi Rob,

      Thank you for reaching out to finder.com.au.

      We are a financial comparison website so are not able to offer specialised financial advice, I would recommend contacting a mortgage broker to get personalised advice your situation.

      Regards
      Jodie

  4. Default Gravatar
    vytheesApril 9, 2015

    I have an investment property with a fixed rate loan. I want to refinance this loan with a different lender and there is a breakeven cost. Is this cost 100 percent tax deductible?
    Thanks.

    • Staff
      MarcApril 17, 2015Staff

      Hi Vythees,
      thanks for the question.

      Yes, fixed rate break fees can be claimed completely in the year they are paid.

      I would recommend contacting a property tax specialist (there’s a form on this page) or the ATO for more information.

      Cheers,
      Marc.

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