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When managing your home loan, having access to extra repayments through a redraw facility might seem like a convenient feature. However, if there's even a slight chance you’ll rent out your property in the future, using that redraw could cost you valuable tax deductions.

Let’s break this down with a real-world scenario many clients overlook.

A Common Mistake with Long-Term Consequences

Imagine someone purchases a home for $100,000 with an $80,000 interest-only loan. Over time, they repay $30,000, reducing the balance to $50,000. So far, so good.

But then, they decide to use the $30,000 they paid down to buy a new car via the loan’s redraw facility—bringing the loan balance back up to $80,000.

Later, they move out and rent the property. That’s where the problem starts.

What Happens to the Tax Deduction?

The ATO allows tax deductions on interest for loans used to produce assessable income—such as rental income. In this case, only $50,000 of the loan remains related to the original property purchase, so only that portion of the interest is deductible. The $30,000 used to buy a personal vehicle? That’s a private expense, and the interest on that amount is not deductible.

What’s worse is that the loan is now considered mixed purpose—part investment, part personal—which complicates your tax reporting and limits your deductions.

The Better Alternative: Use an Offset Account

This whole situation could have been avoided with a simple strategy: parking extra funds in an offset account instead of paying down the loan.

Had our example borrower kept that $30,000 in an offset account, they could have used it to purchase the car without affecting the original loan structure. When they later rented out the property, the full $80,000 loan would remain deductible, preserving the full tax benefit.

Offset accounts don’t reduce the principal; they reduce the interest calculated on your loan balance. This means your loan remains intact (for tax purposes), but you still save on interest during the time you’re living in the property.

Final Thoughts

Tax planning often intersects with personal finance decisions, and this is a perfect example of how everyday choices—like how you manage your home loan—can have long-term tax consequences. Before redrawing funds from your loan, especially if you may rent out the property later, it's wise to seek professional advice tailored to your situation.

At Plan Tax, we help individuals and small business owners make smarter financial decisions that align with both their goals and tax obligations. Whether you're considering renting out a property, restructuring your loans, or simply want to understand the tax impact of your choices—we're here to help.