Investment Loan Tax Deductions & Common Mistakes

Claimable Deductions on Investment Property Loans

Interest on an investment loan is fully deductible against rental income, provided the loan is used to purchase or improve an income-producing property. Borrowing costs, including application fees, valuation fees, and ongoing account-keeping charges, are also claimable, either immediately if under $100 or over five years if the loan term is longer.

Consider a senior associate who refinances an investment loan on an established unit to access a lower rate. The refinance costs $2,800 in total, including discharge fees from the previous lender and establishment fees for the new loan. Because the loan term is 30 years, those costs are deductible at $560 per year over five years. The interest component of each monthly repayment, roughly $2,100 per month at current variable rates, is claimed in full in the financial year it is paid. Rental income is $2,000 per month, so the net loss is around $100 per month before other deductible expenses. That loss reduces taxable income.

Other claimable expenses include property management fees, landlord insurance, council rates, water charges, strata levies, and repairs that restore the property to its previous condition. Depreciation on plant and equipment, such as appliances and carpets, and capital works deductions for the building itself are also available, though these require a quantity surveyor's report. Legal fees related to the purchase or lease preparation, advertising for tenants, and pest control are deductible in the year incurred.

Negative Gearing: How the Rules Changed in May 2026

Negative gearing allows you to offset a rental property's net loss against other income, including salary. From 1 July 2027, losses on established residential properties purchased after 7:30 pm AEST on 12 May 2026 can only be deducted against rental income or capital gains from residential property, not against wages or other income.

If you bought an established investment property before Budget night, the existing rules still apply. Losses can be claimed against all income sources. If you bought after that date, excess losses are carried forward and can be used to offset future rental income or capital gains, but they do not reduce your current year's assessable salary income.

New builds remain incentivised under both the old and new arrangements. Properties classified as new residential premises for GST purposes, typically those not previously sold as residential dwellings, retain full negative gearing benefits regardless of when they are purchased. This distinction makes new apartments and newly constructed houses more attractive from a tax perspective for purchases completed after May 2026.

Capital Gains Tax: The 50% Discount and What Replaces It

Capital gains on investment properties sold after 1 July 2027 will no longer qualify for the standard 50% discount if the property was purchased after 12 May 2026. Instead, gains will be indexed for inflation, so you only pay tax on the real gain after adjusting the cost base for CPI movements during the holding period. A minimum 30% tax applies to capital gains, though this minimum does not apply to age pension recipients or certain other income support recipients.

Investors who purchase new builds after May 2026 can choose between the 50% discount or the indexed cost base method, whichever produces a lower tax outcome. The main residence exemption remains unchanged. Gains that accrued before 1 July 2027 are not affected by the new rules, so if you bought an established property in early 2026, only the gain attributable to the period after 1 July 2027 is subject to the new treatment.

In practical terms, a barrister who bought an established investment property in April 2026 for $850,000 and sells it in late 2027 for $920,000 will have the gain split. The portion of the gain up to 30 June 2027 uses the old 50% discount. The portion after that date uses indexation and the minimum 30% tax. The Australian Taxation Office has indicated that apportionment will be based on time, though detailed guidance is still being finalised.

Interest-Only Loans and Maximising Tax Efficiency

Interest-only repayments on an investment loan increase the deductible portion of each payment because no principal is being repaid. Paying down principal does not create a tax deduction, so keeping the loan balance higher for longer results in higher annual interest deductions, assuming the property remains tenanted and income-producing.

An interest-only term typically runs for one to five years before reverting to principal and interest. During the interest-only period, monthly repayments are lower, which can improve cash flow if rental income does not fully cover all outgoings. Once the loan reverts, repayments increase because principal repayment begins. Some lenders allow you to extend or renew the interest-only period, though this depends on your loan-to-value ratio, rental income, and serviceability at the time of the request.

Switching an investment loan to interest-only does not affect the deductibility of interest, provided the original purpose of the loan was to acquire or improve an income-producing asset. If you later redirect borrowed funds to a non-deductible purpose, such as paying for a family holiday, the interest on that portion is no longer claimable. Keeping loan purposes separate is essential. If you plan to use equity from an investment property for a non-investment purpose, speak to a broker about structuring a separate split or sub-account so that only the investment-related portion remains deductible.

Claimable Expenses Beyond Loan Interest

Repairs that restore the property to its original condition are immediately deductible, while improvements that enhance or add to the property must be depreciated or added to the cost base for capital gains purposes. Replacing a broken dishwasher with a similar model is a repair. Installing a dishwasher where none existed is an improvement.

Body corporate fees are fully deductible in the year they are levied, including special levies for major works, provided the property is tenanted or genuinely available for rent. If the property is vacant but not advertised or genuinely available, deductions may be denied. Keeping records of rental listings and correspondence with property managers is sufficient evidence of genuine availability.

Landlord insurance premiums, including coverage for loss of rent and tenant damage, are deductible in the year paid. Building insurance, if not already included in body corporate fees, is also claimable. Quantity surveyor reports, typically costing $600 to $800, are deductible in the year incurred, and the depreciation schedules they produce can unlock thousands of dollars in annual deductions over the life of the property.

Structuring Loans for Multiple Properties

If you already own one investment property and plan to acquire a second, each property should have its own loan facility to maintain clear deductibility. Mixing funds or cross-collateralising properties can complicate tax reporting and limit flexibility if you later want to sell one property without affecting the other.

Cross-collateralisation means using equity in one property as security for another property's loan. While this can reduce LMI costs or allow you to borrow more, it also means both properties are tied to the same security pool. If you want to sell the first property, the lender may require you to repay both loans or provide alternative security. Keeping loans separate, even if it means paying LMI on the second property, preserves independence and makes future refinancing or portfolio expansion more straightforward.

If you are considering debt recycling to convert non-deductible home loan debt into deductible investment debt, the same principle applies. Each loan must have a clear and documented purpose, and funds must not be co-mingled. A broker familiar with multi-property structuring can recommend lenders that allow split loan facilities within a single security arrangement without cross-collateralisation, giving you flexibility without unnecessary cost.

Deposit Requirements and LMI on Investment Loans

Most lenders require a 20% deposit to avoid Lenders Mortgage Insurance on investment loans. If your deposit is smaller, LMI is calculated based on the loan-to-value ratio and added to the loan amount or paid upfront. LMI on an investment loan is not immediately deductible; it must be claimed over five years or the life of the loan, whichever is shorter.

Legal professionals may have access to LMI waivers on investment loans with certain lenders, reducing the required deposit to 10% or sometimes lower depending on your employer, experience, and income. Not all lenders extend LMI waivers to investment lending, and those that do often apply stricter serviceability criteria than they would for an owner-occupied loan.

If you are using equity from your home to fund the deposit on an investment property, the interest on the amount borrowed against your home becomes deductible only if those funds are used to acquire an income-producing asset. Documenting the flow of funds and the purpose of each drawdown is critical. A separate split loan or offset arrangement for the investment deposit keeps the deductibility clear and avoids issues during a future ATO review.

When to Refinance an Investment Loan

Refinancing an investment loan makes sense when you can reduce your interest rate by at least 0.30% and the savings outweigh the exit and entry costs. Discharge fees, application fees, and valuation costs typically total $1,500 to $3,000, which are deductible over the life of the new loan if over $100.

If your property has increased in value and your LVR has dropped below 80%, refinancing can unlock equity release for further investment or other purposes without triggering LMI. Lenders reassess your income, liabilities, and rental income when you refinance, so ensure your rental income is documented with a current lease and that your tax returns reflect the property's performance.

Some lenders apply a rental income haircut, typically discounting actual rental income by 20% to 30% to account for vacancies and maintenance. If your rental income is $2,000 per month, the lender may only count $1,400 to $1,600 per month when assessing serviceability. Lenders that apply lower haircuts or assess rental income more favourably can improve your borrowing capacity, particularly if you are looking to acquire additional properties.

Call to Action

Tax treatment of investment loans changed materially in May 2026, and the full effect of those changes depends on when you purchased your property, what type of property it is, and how your loans are structured. Call one of our team or book an appointment at a time that works for you to review your current position and confirm your loan structure supports the deductions you intend to claim.

Frequently Asked Questions