Property · Tax planning · Investing
Debt recycling: how home loan debt can become tax deductible
Interest on the loan for the home you live in is not tax deductible. That is a basic rule of Australian tax. Interest on money borrowed to invest usually is.
So one of the most common questions owners ask us is: can my home loan become deductible too?
Not directly. But there is a legitimate strategy, called debt recycling, that can gradually replace non-deductible home loan debt with deductible investment debt. Here is how it works, with numbers.
A worked example
Take an owner we’ll call Sam (the details are illustrative):
| Item | Amount |
|---|---|
| Home loan balance | $1,000,000 at 6% |
| Savings in the offset account | $300,000 |
| Taxable income | $200,000 |
| Marginal tax rate | 47% (including the Medicare levy) |
Sam wants to put the $300,000 into shares. There are two ways to do it.
Option 1: invest the savings directly
Sam takes the $300,000 out of the offset account and buys shares. The home loan interest goes back up by $18,000 a year ($300,000 × 6%), and none of it is deductible.
Every dollar of interest is paid from after-tax income. To break even, the shares need to return about 11.3% a year before tax (6% ÷ (1 − 47%)).
Option 2: debt recycling
Sam uses the $300,000 to pay down the home loan, then borrows $300,000 again through a separate loan split and uses it only to buy the shares.
Sam’s total debt is the same as in Option 1. But now the $18,000 of interest on the investment split is deductible, which saves about $8,460 of tax a year ($18,000 × 47%). The break-even return falls to 6%.
| Option 1: invest directly | Option 2: debt recycling | |
|---|---|---|
| Interest on $300,000 | $18,000, not deductible | $18,000, deductible |
| Tax saved each year | Nil | About $8,460 |
| Return needed to break even | About 11.3% | 6% |
The investment and its risk are the same. The difference is whether the interest is deductible.
What the ATO looks at
Debt recycling is legal, but only if the structure is right. The key principle is this:
Whether interest is deductible depends on what the borrowed money is used for, not on what secures the loan.
Money borrowed for your home is private, so the interest is not deductible. Money borrowed to buy assets that produce income, such as shares, ETFs, managed funds or a rental property, is generally deductible. The ATO’s guidance and rulings (including TR 2000/2) make clear that you must be able to trace where every borrowed dollar went.
Five mistakes to avoid
- Mixing investment and private money in one loan. This is the most common mistake. If private and investment borrowing are mixed, it becomes very hard to show which interest relates to the investment, and you can lose some or all of the deduction. Use a separate split for the investment borrowing.
- Using redraw instead of a split loan. Money drawn from redraw is mixed money and hard to trace. Set up a dedicated investment split instead.
- Investing in assets that don’t produce income. Interest on money used to buy gold, art or vacant land generally isn’t deductible against your other income. Shares, ETFs, managed funds and rental property produce dividends or rent.
- Not keeping records. Keep the loan split documents, transfer records, purchase confirmations and each year’s dividend or rent statements. If the ATO asks, you need to show the link between the borrowing and the investment.
- Assuming it suits everyone. Debt recycling increases your exposure to investment markets with borrowed money.
It may suit you if you have stable income and some savings, invest for the long term (at least five to ten years), and can ride out market falls. It is not for you if your cash flow is tight or a market fall would put you under pressure.
Before you start
- Check your loan structure. Is your home loan already split? A mortgage broker or your bank can set up the splits.
- Be clear on what you will invest in, and that it produces income.
- Know your marginal tax rate. The higher it is, the bigger the tax benefit. At 47%, a 6% interest rate costs Sam about 3.2% after tax.
- Get the right advice. Debt recycling involves your loan, your tax and your investments. We can look at the tax side and how it fits your business and property plans. A licensed financial adviser should advise on the investment itself.
Done properly, debt recycling can save thousands of dollars of tax every year. Done badly, it can mean losing the deductions, plus interest and penalties from the ATO. If you’d like to know whether it makes sense for you, we’re happy to talk it through.
General information only, current as at November 2026. This article is not personal financial, tax or legal advice and does not take your circumstances into account. Debt recycling involves borrowing to invest, which magnifies gains and losses. Please speak to a registered tax agent and a licensed financial adviser before acting.