Apportioning Rental Interest Expenses: What Property Owners Need to Know

If you own a rental property, it’s important to understand how interest expenses must be apportioned for tax purposes. Apportioning is required in the following situations:

• Two or more taxpayers co-own a property, unless there’s a separate legally enforceable written agreement (see below).

• Taxpayers increase the rental property mortgage for private purposes.

• Taxpayers use the property for private purposes.

• The property is only rented out for part of the year.

Co-ownership

Ownership type affects how much each taxpayer can claim:

• Joint tenants: each holds an equal interest in the property.

• Tenants-in-common: interests may be unequal (e.g., 20% vs 80%).

Separate Legally Enforceable Written Agreement

Sometimes lenders require another person to be named on a loan. If that person has no other connection to the rental property, a taxpayer can create a separate legally enforceable written agreement, witnessed by a Justice of the Peace, stating that the taxpayer is 100% responsible for the loan repayments, interest, and expenses.

Including Private Expenses in the Loan

Interest on private expenses cannot be claimed as a tax deduction. Each year, taxpayers or their tax agent should check whether they have:

• Included private items in their rental property loan;

• Refinanced or drawn down on their loan for private purposes.

Once the loan is used for private purposes, interest must be apportioned for the life of the loan. In many cases, it may be simpler to have separate loans for rental and private purposes.

Private Use of the Property

Interest is not deductible for periods the property is used privately, even for a short time. For example, if renting out a single room in your main residence, interest must be apportioned based on time and space used for income-producing activities.

Part-Year Rentals

If the property’s purpose changes (e.g., you move in temporarily), mortgage interest must be apportioned according to the period the property was rented out.

For more detailed guidance, taxpayers can refer to the ATO’s ‘Interest expenses’ (QC 103911) page.