Interest deductibility and investment properties

With interest rates remaining stubbornly high, and some property investors bailing out altogether, others are taking steps to refinance their debt in order to secure a lower rate and obtain better terms.

Before deciding to go down the refinancing route there are broader financial issues to weigh up and you may need to seek separate financial advice that takes into account your personal and financial circumstances. This article only examines the tax consequences of refinancing your investment property loan and some other issues around interest deductibility.

Basic rule for interest deductibility

The basic rule is that where you borrow money to acquire an income producing asset, the interest is deductible against your assessable income generally, including income from salary and wages. It’s about following the money and being able to demonstrate that a loan was used for income producing purposes. Any security given over a loan does not determine the deductibility of the interest.

Maximising tax deductible debt

There is nothing improper or untoward about maximising your tax deductible debt. We live in an after tax world and it’s perfectly legitimate to factor tax into your financial decision making.

Lower rate on refinancing

Where the refinancing involves no more than obtaining a reduced rate or better terms, there has been no additional borrowing and the interest on the new loan remains deductible in full, assuming the property is let or available to let.

Releasing equity

Where the refinancing releases equity in the investment property, interest deductibility depends on how the additional loan funds are applied. If they are used to maintain or renovate the investment property (or to buy other income producing assets), all the interest payable on the increased loan balance will be deductible.

However, where all or part of the equity released is applied for private purposes (like renovating the house you live in, to pay for a holiday or to buy a car), the interest would need to be apportioned between the amount originally used to acquire the investment property (deductible) and the amount used for private purposes (non-deductible).

Refinancing costs

Refinancing costs for the investment property such as exit fees, valuation fees, break costs and legal fees are deductible over five years or the term of the new loan if that is shorter.

Change in use

What if there is a change in use of the investment property? You might decide to move into the property yourself or to make it available to a family member free of charge. As soon as the investment property stops being used to generate rental income, the interest associated with the loan taken out to acquire the property stops being deductible.

By the same token, if you move out of your main residence to go and live somewhere else and you put tenants in, any interest on the mortgage over the property will become deductible.

Debt in the wrong place

Sometimes, through circumstances beyond your control, you can end up having debt in the wrong place. For example, you may have a mortgage over the house you live in and inherit the house of a relative which is unencumbered by debt. If you decide to keep the inherited property and put tenants in, you will have non-deductible home mortgage interest as well as an investment property that is debt-free.

While you could borrow using the inherited property as security and use the funds to pay off your home mortgage, that would not get you a tax deduction, as the borrowed funds would have been used to pay off private debt. Remember, it’s the use to which the funds are put that determine tax deductibility – not the nature of the security provided. The only way to make the interest tax deductible in this situation would be through a change in use. For example, you may decide to move into the inherited property and let out your main residence.

Forced sale

Real estate values can go down as well as up, and sometimes life’s events (rising interest rates, unemployment, illness, divorce) can leave the property owner with no other option but to sell the property, sometimes with part of the borrowing remaining unpaid. Any interest on the outstanding balance would generally be tax deductible, although the ATO would expect the investor to make a reasonable effort to pay down the remaining debt rather than acquire more assets.

Before deciding how to refinance an investment loan or taking any other steps that could impact on the tax deductibility of interest, come in and have a chat with us. We may be able to help you protect the interest deductibility you are legitimately entitled to.

< Older Post

Newer Post >

Previous Blog Posts:

Surviving (and maybe avoiding) an ATO audit

By Brad Dickfos • January 27, 2026

This article focuses on self-employed clients. If you’re a salary earner or retiree, you might find one of our other blogs more helpful.

The 50% CGT discount: More than meets the eye

By Brad Dickfos • January 9, 2026

There is much in the media about how the 50% capital gains tax (CGT) discount has contributed to the housing affordability problem in Australia (although no doubt the problem is a lot more complex than attributing it mainly to any taxation measure or measures).

Could you be missing out on thousands in lost super?

By Brad Dickfos • December 18, 2025

Most of us keep a close eye on our bank accounts. But superannuation can be easier to lose track of, especially if you’ve changed jobs, moved house, changed your name, or simply set up a new fund and assumed everything followed you. That’s why the Australian Taxation Office (ATO) has issued a timely reminder. There is now $18.9 billion in lost and unclaimed super sitting across Australia. That’s up $1.1 billion since 2024 and spread across just under 7.3 million accounts. In other words, a lot of Australians have retirement savings that aren’t currently working for them and some of it could be yours. What “lost” or “unclaimed” super actually means Super doesn’t vanish, but it can go missing from your radar. It typically happens when an account becomes inactive and your super fund can’t contact you, or when you end up with multiple funds over the years. The ATO also holds certain amounts of super on behalf of individuals, for example, small inactive balances that have been transferred to the ATO, or other unclaimed amounts. The average amount of lost or unclaimed super is around $2,590 per person. That might not sound life-changing today, but over time it can grow into tens of thousands by retirement. A special note if you have an SMSF If you have an SMSF, this ATO update is particularly worth paying attention to. When you established your SMSF, you might have transferred most of your super across, but kept some behind, for example, to retain insurance cover through another fund. That means there could still be older super accounts from past jobs or retail/industry funds sitting in your name. The ATO is urging SMSF members to do a check, because a share of the $18.9 billion in lost and unclaimed super might be yours and could be rolled into your SMSF. One important practical tip is that if you locate lost super and want to move it into your SMSF, but your SMSF doesn’t show up as a transfer option in ATO online services, it’s often due to the fund’s compliance status. Take a moment to confirm your SMSF is listed as “complying” or “registered” on Super Fund Lookup. How to check for lost super (it only takes minutes) The ATO has made this super simple (pun intended!). You can: 1. Log in to myGov and go to ATO online services 2. Navigate to the Super section to view: Super held by the ATO Any lost or unclaimed accounts 3. Request a transfer to an eligible super account. Even if you don’t find anything, you’ll at least know everything is where it should be. Simple habits that help you stay on top of super Finding lost super is great but preventing it from happening at all is even better. A few easy habits can make a big difference: Keep your details up to date with your fund and the ATO so you stay contactable. Check whether you’ve got more than one account. Multiple accounts can mean multiple fees and duplicated insurance Consider consolidating if it suits your situation. Fewer accounts can mean lower fees and easier management but just be sure to check any insurance you might lose before rolling over Read your annual statement. It’s a quick way to confirm contributions, fees, returns, investment mix and beneficiaries. Why acting now matters Since 2022, the ATO has already reunited Australians with about $5.5 billion in previously unclaimed super. But there’s still nearly $19 billion waiting to be found. A few minutes today could translate into a healthier retirement balance later. It’s easy to put super in the “deal with it later” basket, but it’s still your hard-earned money. If you want a hand finding lost super, combining accounts, or moving money into your SMSF, reach out to us. We can guide you through the steps and make sure you’re able to claim any lost super without any hassles.