Interest rates are the largest deductible claimed against rental incomes, so they often demand the greatest attention. This is relevant, no matter how frustrating some people find the very concept of interest.
When interest on a loan reduces a rental loss, the investment property is called “negatively geared.” This allows the property to be “controlled” through a small deposit, usually with the help of a larger loan.
The net loss is offset against the owner’s other sources of income. This reduces the tax payable and makes property investing more attractive. This, in turn, allows the owner to claim the insurance as deductible and save him or her a little money.
For interest to qualify as deductible, some steps need to be followed.
First, the principal loan funds have to be applied to an income-producing asset. In other words, whatever was purchased with the loan has to generate cash flow to pay it back.
Apportionment is also a necessity if the loan is funding both a rental investment and a private asset.
Be sure to keep detailed, precise records. They will become invaluable.
There are instances when interest and loan repayments are made based on capacity to pay. These are different from the equity portions of the title deed. Calculating an equalising factor can be a challenge if there are no clear, meticulous records.
Be very careful in scrutinising any plan or scheme that offers a faster reduction of the home loan balance, while also claiming to maximise deductions of interest on rental investments. These mean that the interest on the loan is capitalised, and this may not be what you want to achieve.
As always, consult a tax and investment professional for better information. Many nuances can trip up even experienced investors. Having a professional ready with advice and analysis can be invaluable.