Interest-deductibility rules for investment properties

These rules are often something property investors are often confused about!

An overview of the rules

The previous government brought in interest-deductibility limitation rules which did exactly that; limited the amount of mortgage interest you could claim against your investment properties rental income.

This INCREASED the amount of tax you had to pay as it INCREASED the profit that your rental made.

These rules were gradually introduced, with the limitation being 25% for the first half of FY2022, 25% for FY2023, and 50% for FY2024 (the financial year that’s just ended).

Proposed changes to the rules..

The new government has just about guaranteed that they will reverse these rules. We will here confirmation at the end of the month in the budget, but it’s pretty much going to happen.

The rules will be phased out. For the current financial year ending 31 March 2025, the limitation will be 20%, with full deductibility coming into effect the following financial year.

How does this effect you? Let’s work through an example..

Let’s work through an example to help clarify what this actually means.

Using the current rules first, let’s say for the last financial year (FY2024) you have total rental income of $50k. Expenses amount to call it $30k. Of this $30k, $20k is mortgage interest.

Given only 50% of interest is deductible for FY2024, your net taxable profit is actually $30k, rather than $20k. If these rules were reversed completely, and mortgage interest was 100% deductible, you would be paying tax on $20k.

Tax on $30k is $10k, while tax on $20k is $6k (using a 30% tax rate).

Hence, your tax bill has now increased by $4k for the year, or $80 per week (based off a 30% tax rate).

Now, for financial year 2025, the government is proposing a 20% limitation, which if we use the example above, would result in an increased tax bill of $7.2k, compared to $6k when interest deductibility is restored completely.