Can I do negative gearing on a home equity loan?

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RachelATO · Answer

Whether you can claim deductions for rental property expenses depends on how you use the property. If you rent out the main house and live in a granny flat or extension on the same property, you can generally claim deductions for expenses related to the rented portion. This includes interest on money borrowed to build or purchase the rental part of the property. The rental income you receive is assessable income that you must declare on your tax return. You can claim deductions for expenses associated with earning that rental income, but you need to apportion these expenses correctly. You can only claim the portion of expenses that relates to the part of the property that's rented out and available for rent. It doesn't matter whether you live in the granny flat and rent the house or live in an extension and rent the house, the principle is the same. You declare the rental income and claim deductions only for the expenses relating to the rented portion. Keep in mind that renting out part of your property means you won't be entitled to the full main residence exemption from capital gains tax (https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/property-and-capital-gains-tax/your-main-residence-home/using-your-home-for-rental-or-business) when you sell. You'll need to pay CGT on the portion that was rented out. For the parts of your loan used for other purposes (like the $10,000 for loan repayments during construction or $5,000 for a car), you can't claim deductions for interest on those amounts because they're not used to earn rental income. You'll need to read our rental properties guide (https://www.ato.gov.au/forms-and-instructions/rental-properties-2025/general-guidance-for-rental-property-owners) to understand how to apportion your expenses correctly and what records to keep. We also have information about renting out all or part of your home (https://community.ato.gov.au/s/article/a07RF00000JHbe8/Renting-out-all-or-part-of-your-home-What-you-need-to-know-for-your-tax-return) that covers the key points for your tax return.

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