Top 10 Ways to Maximise Tax Deductions on Investment Loans

Interest on your investment loan remains fully deductible, but the way you use that deduction is about to change.

From 1 July 2027, net rental losses on most established properties purchased after May 2026 can only be offset against other rental income or carried forward. They can no longer reduce your salary or wage income. Properties bought before that date, and qualifying new builds bought after, keep the existing negative gearing rules. The structure you choose now determines the tax treatment you receive later.

Interest on Borrowings: Still the Largest Deduction

Interest on any loan used to acquire or hold a rental property is deductible against rental income, provided the property is rented or held to produce assessable income. This applies whether you choose a variable or fixed rate, and whether repayments are principal and interest or interest only. Interest only loans leave more cash available each month, which can matter during vacancy periods or when paying for urgent repairs.

Consider a buyer who purchased a three-bedroom house in The Basin in early 2026 with a loan amount of $600,000. On an interest only loan at a variable interest rate, monthly interest is around $3,000. That $36,000 per year is fully deductible. The same buyer on principal and interest repayments would pay closer to $4,100 per month, but only the interest portion is claimable. The principal repayment builds equity but delivers no immediate tax benefit.

Interest deductibility only applies to the portion of the loan used for investment purposes. If you refinance and draw extra funds for a private holiday, that portion is not claimable. Lenders and accountants both care about loan purpose, so keep borrowings for the property separate from personal spending.

Property Management and Maintenance Costs

Property management fees, council rates, water rates, building insurance, landlord insurance, and body corporate fees are all claimable in the year you pay them. Repairs that restore the property to its previous condition are immediately deductible. Improvements that add value or functionality must be depreciated over time.

In our experience, investors in The Basin often underestimate ongoing costs. A property manager typically charges 6 to 8 per cent of the weekly rent, plus a letting fee when a new tenant moves in. On a property renting for $550 per week, that's around $1,700 to $2,300 per year in management fees alone. Body corporate fees for units near the Bimbadeen Avenue precinct can exceed $1,000 per quarter. All claimable, but they reduce net rental income and should be factored into your borrowing capacity when applying for investment loans.

Negative Gearing Under the New Rules

If you bought an established property after 7:30pm on 12 May 2026, any net rental loss from 1 July 2027 onward is quarantined. You can use it to offset income from other residential rental properties, or carry it forward to offset future rental income or capital gains on residential property. You cannot use it to reduce your wage or salary income.

Properties purchased before that date, or under contract at that time, are grandfathered. They continue under existing negative gearing rules until sold. Qualifying new builds purchased after that date also retain access to full negative gearing, provided the property was constructed on previously vacant land or replaces an existing dwelling while increasing the total number of dwellings on the site.

The difference in after-tax cost can be substantial. Take an investor on a marginal tax rate of 37 per cent with a $15,000 annual rental loss. Under existing rules, that loss reduces taxable income by $15,000, saving $5,550 in tax. Under the new rules, if the investor has no other rental income, the loss is carried forward with no immediate tax benefit. The property still builds equity and may deliver capital growth, but the cash flow impact is higher.

Depreciation: Building Write-Off and Plant and Equipment

The building structure can be depreciated at 2.5 per cent per year if constructed after 15 September 1987. Plant and equipment such as dishwashers, air conditioners, blinds, and carpets can also be depreciated, though rules introduced in 2017 limit plant and equipment deductions for subsequent purchasers of established properties.

A quantity surveyor prepares a depreciation schedule, typically costing $500 to $700. For a property in The Basin built in the late 1990s, annual depreciation deductions might total $3,000 to $5,000 in the early years. That's not cash you spend, but it reduces your taxable rental income. Depreciation is particularly valuable for new or near-new properties, where both building and plant deductions are highest.

Depreciation deductions are added back to your cost base when calculating capital gains tax on sale, but the benefit of deferring tax over 10 or 15 years can still be significant.

Interest Only or Principal and Interest Repayments

Interest only repayments are not inherently more tax effective, but they leave more cash available each month. For investors building a property portfolio or relying on rental income to service multiple loans, that cash flow flexibility can be the difference between comfortably covering a vacancy and needing to dip into savings.

Interest only periods typically run for one to five years, after which the loan reverts to principal and interest unless you negotiate an extension. Some lenders allow multiple rollovers, others do not. If your property investment strategy involves holding long-term and building wealth through capital growth rather than equity reduction, interest only loans align with that approach.

Principal and interest repayments reduce the loan balance over time, which lowers your total interest cost and can improve your borrowing capacity for future purchases. If you're planning to buy a second property within a few years, paying down the first loan can create equity to use as a deposit. The choice depends on whether you prioritise cash flow now or borrowing capacity later.

Loan Structure and Splitting for Future Flexibility

If you plan to buy a home to live in after renting for a few years, or if you might convert your current home into a rental property later, loan structure matters. Interest is only deductible to the extent the loan is used for investment purposes. If you pay down a loan and then redraw for private use, that redrawn portion is not claimable.

A split loan structure keeps investment and private borrowings separate from the outset. You might take one loan for the investment property deposit and another for your home deposit, even if both are secured against the same property. When you later sell or refinance, the trail is clear. This is particularly relevant for borrowers in The Basin who buy an investment property first and plan to purchase an owner-occupied home in Montrose or Ferntree Gully within a few years.

If you're considering refinancing an existing loan, ask whether the new structure will preserve deductibility if your circumstances change. Accountants often pick up structure issues years after the loan was written, when it's too late to fix without cost.

Lenders Mortgage Insurance and Upfront Costs

Lenders Mortgage Insurance is payable when your loan to value ratio exceeds 80 per cent. LMI protects the lender, not you, but if the loan is for investment purposes the premium can be claimed as a deduction. The deduction must be spread over five years or the life of the loan, whichever is shorter. On a premium of $15,000, that's $3,000 per year for five years.

Stamp duty on the property purchase is not immediately deductible. It forms part of the cost base for capital gains tax purposes, which reduces your taxable gain when you sell. Legal fees, building and pest inspections, and loan application fees related to the investment loan can generally be claimed in the year incurred.

Capital Gains Tax Changes from July 2027

For assets acquired after 1 July 2027, the 50 per cent CGT discount is being replaced with cost base indexation and a 30 per cent minimum tax rate on real capital gains. Gains accrued before that date on existing properties continue under current rules. The change applies only to gains accruing after 1 July 2027, so if you purchased in 2026, part of your eventual gain will be calculated under the old rules and part under the new.

Qualifying new builds purchased after 1 July 2027 offer an election between the 50 per cent discount and the indexed cost base with the 30 per cent minimum rate. Depending on how long you hold the property and inflation over that period, one approach may deliver a lower tax outcome than the other. The election is made at the time of sale, so you can calculate both and choose.

For investors on lower incomes or receiving means-tested income support, the 30 per cent minimum rate may not apply. Recipients of such payments are exempt from the minimum rate in any financial year they receive a payment.

Borrowing Capacity and Rental Income Assessment

Lenders assess rental income at 70 to 80 per cent of the market rent to account for vacancy, management, and maintenance. If a property rents for $550 per week, the lender might assess $440 per week as income. They add that to your other income and subtract all loan repayments, living expenses, and other commitments to calculate borrowing capacity.

The debt-to-income cap introduced in February 2026 limits how much you can borrow relative to your gross income. Lenders can write up to 20 per cent of their investor loan book above six times income, but most prefer to stay well within that limit. If your combined salary is $120,000, a six times DTI cap would limit total borrowing to $720,000 across all loans. Existing debt counts toward that figure, so if you already have a $500,000 home loan, your capacity for an investment loan is reduced.

New builds and finance for constructing a new dwelling are exempt from the DTI cap, which is one reason why qualifying new builds remain attractive despite higher purchase prices.

Choosing Between Variable and Fixed Rates for Tax Planning

Interest deductibility does not depend on the rate type you choose. Both variable and fixed rate loans deliver the same tax outcome, provided the interest is for investment purposes. The difference lies in cash flow predictability and your view on future rate movements.

A variable rate allows extra repayments, redraw, and offset accounts. A fixed rate locks your repayment amount for one to five years but typically charges break costs if you repay early. If you plan to sell or refinance within the fixed period, those break costs can exceed any benefit from rate certainty. For investors holding long-term, fixing part of the loan can smooth cash flow without giving up all flexibility.

We regularly see borrowers in The Basin fix 50 to 70 per cent of the loan amount and leave the rest variable. That approach provides some rate protection while preserving access to offset and redraw on the variable portion.

Call one of our team or book an appointment at a time that works for you. We'll work through the tax treatment, the numbers, and the loan structure that fits your plans.

Frequently Asked Questions