Interest Deductibility and why it matters for Property Investors
One key aspect of owning a rental property is understanding the intricacies of interest deductibility, a crucial concept that can significantly impact your financial outcomes as a property owner.
What is Interest Deductibility?
Interest deductibility refers to the ability of property owners to deduct the interest paid on their mortgage loans from their taxable income.
In simpler terms, the interest paid on the money borrowed to finance the purchase or improvement of a rental property can be subtracted from the property's income, reducing the owner's taxable income and potentially lowering their tax liability.
Two types of Deductible Interest:
1. Interest on Loans for Rental Property Purchase: If you took out a loan to purchase a rental property, the interest on that loan is typically deductible.
2. Interest on Loans for Property Improvement: If you borrow money to make improvements to your rental property, the interest on that loan is also usually deductible.
Benefits of Interest Deductibility
1. Tax Savings: By deducting the interest paid on your rental property loans, you can potentially reduce your taxable income, leading to lower tax liability.
2. Increased Cash Flow: Lowering your taxable income through interest deductibility can result in increased cash flow, providing you with more funds for property maintenance, improvements, or other investments.
1. Keep Accurate Records: It is crucial to maintain detailed and accurate records of all transactions related to your rental property.
This includes invoices, receipts, and loan statements, which will be essential when claiming interest deductions.
2. Loan Allocation: If you have a mortgage that covers both your rental property and personal use, it's essential to allocate the interest to the appropriate portion.
This ensures that you only claim deductions for the interest related to your rental property.
3. Changing Legislation: This is the big one. The previous Labour government began phasing out interest deductibility for property investors.
The new National led government intends to reverse those changes and gradually increase interest deductibility back to 100%.
As with all tax legislation the devil is in the detail and you should clarify your situation with an accountant or study the IRS rules.
Read my other blog (‘National wins: 3 changes coming for Property Investors”) for more information on Interest Deductibility and other changes impacting property investors post-election.