Residential Rental Loans – Interest Deductibility, Offset & Redraw Facilities

Lewis Thomas • September 17, 2024

One of the most common incorrectly claimed deductions against rental property income is interest . If you borrow to purchase a rental property any interest you incur on that loan will generally be tax deductible. But what if that loan has a redraw facility – what happens if redraw against the loan balance?  Is the interest still tax deductible?  The answer – it depends!

In this instance every transaction needs to be considered because if the redrawn amount is used for private purposes , then the interest deduction needs to recalculated to take into account the now private portion of the loan.

Example :

Bill has borrowed $400,000 to purchase a rental property. The property is rented for the entire duration of the loan. After 10 years the loan has been paid down to $200,000. Bill then decides to redraw a further $200,000 to pay off a second loan not related to the rental property. Now, only 50% of Bill’s loan relates to the rental property. Consequently, only 50% of the interest component will now be deductible against the property’s rental income. This takes effect for remaining life of the loan or until another draw down or re financing has been made.

Every time a redraw transaction is used for a private purpose, the deductible portion of the loan interest must be adjusted.

This is important to consider when thinking about re-drawing to pay for everyday costs such as groceries and bills, as it will continue to result in a lower interest deduction.  There are 2 ways this issue can be addressed, so you can continue to maximise your loan interest deduction:

  1. Do not use your redraw facility to pay for private expenses – not always an easy option.
  2. Use an offset account rather than a redraw account.

An offset account is a completely separate account which can be used to accumulate savings and excess cash reserves.  The beauty of an offset account is it works exactly the same way as a redraw facility, as the balance of the offset account is used to reduce the loan balance when calculating interest.

The main difference though is when you withdraw money from your offset account, regardless of whether this is for a private purpose, it does not affect your ability to claim any interest deduction on the loan.  This also means you do not have to do calculations each time a private withdrawal from the offset account (as you would with a redraw facility).

More GTP Articles

Bookkeeping Tips

By Natasha Gardner • March 26, 2025
Effective bookkeeping is vital for the success of any business. By understanding and implementing various methods, leveraging the right software, avoiding common mistakes, and following practical tips, you can maintain accurate financial records and make informed business decisions. Common Mistakes Below are some pitfalls to watch out for: By being aware of these common mistakes [...] Read More The post Bookkeeping Tips appeared first on Green Taylor Partners.

Fringe Benefits Tax (FBT) Explained: What Employers Need to Know

By Regina Chia • March 19, 2025
Fringe Benefits Tax (FBT) is an important consideration for employers who provide additional perks to their employees. Whether it’s a company car, free gym memberships, or entertainment benefits, these perks may be subject to FBT. Understanding how FBT works can help businesses remain compliant and avoid unnecessary tax liabilities. In this article, we’ll break down [...] Read More The post Fringe Benefits Tax (FBT) Explained: What Employers Need to Know appeared first on Green Taylor Partners.

Building a Brand Identity to Standout in a Competitive Market

March 17, 2025
Some major businesses are able to ‘capitalise’ their brands. That means the brand has been valued and included as a balance sheet asset.  Most businesses don’t go to those lengths… but leaders who build valuable brands usually have a better chance of standing out and attracting customers and partners.  Let’s look into what makes a [...] Read More The post Building a Brand Identity to Standout in a Competitive Market appeared first on Green Taylor Partners.

Death & Taxes – What happens when I die?

By Matt Richardson • March 12, 2025
There are some general rules you need to be aware of when preparing your own Estate Planning or having some role in the affairs of a deceased estate. Inheritance There is no tax payable on assets which pass from an Estate to a beneficiary in accordance with the deceased’s Will. Final Tax Return The deceased [...] Read More The post Death & Taxes – What happens when I die? appeared first on Green Taylor Partners.

Tax Planning

By Kathryn Hamilton • February 26, 2025
As much as it sucks, tax is a part of life and I am sorry to say but it isn’t going anywhere! To reduce it, you could be doing some forward planning to make informed financial decisions. Everyone can benefit from tax planning from the biggest business to an individual. Why is tax planning important? [...] Read More The post Tax Planning appeared first on Green Taylor Partners.
More Posts