Know How to Use Tax-Deductible Loans to Build Wealth in 2025

Using tax-deductible loans wisely can be a powerful way to grow your wealth—whether you’re buying an investment property or funding a business purchase. But in 2025, with the ATO increasing its compliance efforts, it’s more important than ever to understand how to claim interest deductions correctly.

If you’re a property investor or small business owner, the way you structure and use your loans can have a big impact on your tax position. And whether you use a tax agent or lodge your own return, you’re still responsible for making sure everything is reported accurately.

In this article, we’ll break down how to claim interest the right way on loans used to build wealth through property investment or business growth. We’ll also highlight common mistakes, explain what records you need, and help you stay compliant while maximising your deductions.

Keeping the Right Records for Your Investment Property in 2025

In the 2025 Federal Budget, the ATO was allocated nearly $1 billion to ramp up its efforts in tax compliance and audit activity—with a strong focus on property investors and small business owners. That means accurate record-keeping is more important than ever.

To claim deductions for your investment property, or for a loan taken using property equity to purchase a business, investment property, or business assets, you must keep proper evidence of both rental and business income, including interest expenses. This helps prove the interest is being claimed against income-producing assets. Acceptable records include invoices, receipts, and bank statements. It’s also wise to keep digital copies in case the originals are lost or damaged.

To show your property was genuinely available for rent, retain copies of rental advertisements. You should also keep your title deed to prove ownership and use bank statements or end-of-year loan summaries to support your interest deductions.

Claiming Interest on Your Mortgage and Equity Loan in 2025

Interest on loans is often one of the largest deductions a property investor can claim. To ensure you’re staying compliant and making the most of your tax return in 2025, it’s important to understand when interest is deductible.

You can generally claim interest on a loan that was used to purchase the investment property itself. This includes traditional mortgage interest on a loan taken out to acquire the rental. If you’ve used an equity loan—for example, by borrowing against your home to fund a deposit or pay stamp duty on the investment property—interest on that loan is also deductible, provided the borrowed funds were clearly used for the property.

Interest is also claimable when you’ve borrowed money to buy depreciating assets for the property, such as an air conditioner, or to fund necessary repairs, like fixing a leaking roof after storm damage. If you’ve undertaken renovations to improve the property, interest on those loans may be deductible too, as long as the renovations aren’t so extensive that they become capital works (in which case, different rules apply).

Lastly, if you’ve taken out a loan to pre-pay rental property expenses—such as insurance or interest itself—up to 12 months in advance, the interest on that borrowing is usually deductible as well.

Understanding how interest deductions work across these different scenarios can help you maximise your property investment tax benefits while staying compliant with ATO rules.

Using Investment Property Equity to Buy Your Home? 

A common mistake made by property investors is assuming that if they use the equity in their investment property to take out a loan and buy a home to live in, the interest on that loan is tax deductible. This is not the case.

The ATO doesn’t assess deductibility based on what the loan is secured against, but rather how the borrowed funds are used. If the funds are used for private purposes—such as purchasing your primary residence, buying a car, or paying personal expenses—the interest is not deductible, even if the loan is tied to your investment property.

For example, if you’ve built up equity in your investment property and you draw against that equity to help fund your dream home, you cannot claim the interest on that loan in your tax return. While the property securing the loan may be an investment, the purpose of the loan is personal—so the interest doesn’t qualify as a tax deduction.

Using Property Equity to Buy a Business or Business Assets—Is the Interest Tax Deductible?

If you’re a business owner planning to buy a business using an equity loan—whether from your home or an investment property—the key question is: can you claim the interest as a tax deduction? The answer depends on how the borrowed funds are used, not what the loan is secured against.

If the equity loan is used to purchase a business or business assets (like equipment or stock), the interest can generally be claimed as a tax deduction. But it won’t be claimed under your property—it will be claimed through your business’s profit and loss statement, assuming the loan is used for income-producing purposes in the business.

It’s very important to keep clear records showing that the loan funds went directly into the business. If any part of the loan is used for personal spending, the interest on that portion won’t be deductible. Also, if the loan is used partly for business and partly for something else, you’ll need to split the interest accordingly.

So, while using property equity can be a smart way to fund a new business, make sure the purpose of the loan is clearly documented so you can claim the interest correctly through your business.

Restrictions on Claiming Interest in 2025

With interest rates still high in 2025, the ATO is keeping a close eye on large interest deduction claims made by property investors and business owners. If you’re claiming a significant amount of interest on your investment property loan, it’s important to make sure every dollar is backed by a legitimate income-producing purpose.

You cannot claim interest for periods when the property was used for private purposes, even if it was just for a short stay. The same applies to any portion of the loan that was used for personal spending, whether as part of the original loan or through refinancing. A common trap is redrawing from your investment loan for personal use—such as holidays, school fees, or home upgrades. Even if you’re ahead on repayments, interest on redrawn amounts used privately is not deductible. This is why it’s essential to understand the difference between a redraw facility and an offset account.

Interest is also not deductible on loans used to purchase a new home for personal use, even if the investment property was used as security. Similarly, if you’ve borrowed to buy vacant land, interest can’t be claimed until construction is complete and the property is genuinely available for rent.

Borrowing Expenses for Your Investment Property in 2025

When you take out a loan to buy an investment property, you may incur borrowing expenses—costs directly related to setting up the loan. These can include loan establishment fees, lender’s mortgage insurance (LMI), valuation fees, title search fees, mortgage broker fees, solicitor fees for loan documents, and stamp duty on the mortgage (not the property transfer).

If your total borrowing expenses are over $100, you must claim them over five years or the loan term, whichever is shorter. If they’re $100 or less, you can claim the full amount in the same year.

If the loan is repaid early, you can deduct the remaining balance in the final year. And if the loan started partway through the year, your first-year deduction must be apportioned based on how many days the loan was held.

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Conclusion

Using tax-deductible loans, the right way can help you grow your wealth through smart property investment and business decisions—but only if you understand how the tax rules work. In 2025, the ATO is paying closer attention to interest deductions, so it’s critical that your claims are based on how the loan funds were actually used—not just what the loan is secured against.

Avoiding common mistakes—like claiming interest on personal use, mixing private and business expenses, or relying solely on the property used as security—will help you stay compliant and protect your deductions.

If you’re not sure whether your interest expenses are deductible, or how to structure your loans for the best outcome, reach out to the specialist team at Investax Group. We’ll help you stay on the right side of the tax law while making sure your borrowing strategy supports your long-term wealth-building goals.

Reference

ATO – Investment Tool 

ATO – Evidence 

Offset Vs Redraw