Borrowing expense tax deduction for property investment

One of the most commonly missed tax deduction for property investors is borrowing expenses. As a property investor there are certain deductions you can claim in your tax return when taking out a new loan to purchase an investment property.

You can claim the following costs:

–          Stamp duty charged on the mortgage

–          Title search fees charged by your lender

–          Loan establishment fees

–          Lenders mortgage insurance (generally applies where you borrow more than 80% of the property’ value)

–          Mortgage broker fees

–          Fees for valuation required for loan approval

–          General costs for preparing and filing mortgage documents

Note that you cannot claim the stamp duty you pay to the state/territory for purchase of property title or solicitor fees for purchase of property.

Borrowing costs are claimed over 5 years or the life of the loan (whichever is less) if in excess of $100. The first year is prorated.

For example Tony took out a 25 year loan for $500,000 and on 1 November 2020 and incurred the following borrowing expenses:

–          Lenders mortgage insurance $2500

–          Loan establishment fees $500.

The total borrowing expenses of $3,000 will be claimed over 5 years however the deduction for the first year will have to be calculated on a pro-rata basis as $3000 * 1/5 * 8/12 = $400.

Tony will claim a tax deduction of $400 in his 2012 tax return. The following year Tony will claim a tax deduction of $600 in his 2013 tax return and so on until the full $3000 deduction is claimed.

If however Tony decides to pay off the loan within 5 years say in year 3 then the balance of the borrowing costs will be claimed in the year of repayment which in this case will be the 2014 financial year. The calculation will be as follows:

                Year 1 2012 tax return deduction: – $400

                Year 2 2013 tax return deduction: – $600

                Year 3 2014 tax return deduction: – $2,000

You can see that the remaining borrowing expenses will be claimed in the 2014 financial year.

You can speak to one of our property investor tax specialists for specific advice based on your individual circumstances, make a free enquiry.