Top 10 Ways to Maximise Tax Deductions on Investment Loans

Investment loan interest is tax deductible when the property is rented or genuinely available for rent.

The tax treatment of your investment loan depends entirely on when you buy. Properties held at 12 May 2026 or purchased as new builds continue to allow full interest deductibility against all income. Established properties acquired after that date can only deduct losses against residential property income from the 2027-28 income year onward. The difference compounds quickly.

Consider a data analyst earning $135,000 who borrows to purchase an established rental property in September 2026 at a variable rate with interest-only repayments. Annual interest costs sit around $28,000, while rental income after management and other deductible holding costs produces a net loss of $12,000. Under the pre-May rules, that loss would reduce taxable income by $12,000, delivering a refund of roughly $4,400 at marginal rates. Under the new rules applying from 1 July 2027, the loss can only offset other residential property income. Unless this investor already holds another rental property generating gains or rental profit, the deduction is quarantined and carried forward. The cash impact in year one shifts from a $4,400 refund to zero immediate benefit.

Interest Deductibility When You Split Purpose on the Same Loan

Interest is only deductible to the extent borrowings are used to produce assessable income. If you draw additional funds on an existing investment loan to pay for a private expense such as a car or overseas holiday, the portion attributable to that drawdown is not deductible. Lenders do not automatically separate the loan into deductible and non-deductible components. You need to keep your own records showing how each dollar was applied. An offset account linked to an investment loan should be used carefully. Depositing rental income into the offset reduces your interest cost but does not change the deductibility calculation, because the entire loan remains for investment purposes. Withdrawing funds from the offset for private use does not convert loan interest into a personal expense. The loan itself remains fully deductible as long as the original borrowing was used to acquire or hold the rental property.

Deducting Loan Establishment Costs and Ongoing Fees

Loan establishment fees, valuation costs, legal fees for preparing the loan documentation and lenders mortgage insurance premiums are deductible over five years or the term of the loan, whichever is shorter. If you refinance or pay out the loan early, any remaining unamortised balance is deductible in the year of discharge. Ongoing fees such as annual package fees, account-keeping charges and redraw fees are fully deductible in the year they are incurred. Interest charged on borrowings used to pay the LMI premium is also deductible, provided the underlying loan is for investment purposes.

How Offset Accounts Affect Your Tax Position Without Reducing Deductions

An offset account reduces the interest you pay but does not reduce the amount of interest you can claim. If your investment loan balance is $500,000 and you hold $50,000 in a linked offset account, you pay interest on $450,000 but you can still claim the deduction as if the loan were $500,000, because the loan itself has not been repaid. The $50,000 remains accessible. This structure works well for data analysts managing variable income from bonuses or retention payments. You can park those funds in the offset to reduce interest costs immediately, then redeploy them when needed without triggering a new drawdown or affecting the deductibility of the original loan. The offset does not count as a loan repayment under the Income Tax Assessment Act.

Grandfathering Rules for Properties Held at 12 May 2026

Properties held at 7:30pm AEST on 12 May 2026, including those under contract awaiting settlement at that time, retain full access to negative gearing regardless of when they are sold. A data analyst who exchanged contracts in April 2026 and settled in June 2026 can continue to deduct losses against salary indefinitely under the grandfathering provisions in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026. Properties acquired between 12 May 2026 and 30 June 2027 fall into a transition period. Losses on those properties can be deducted against all income until 30 June 2027 only. From the 2027-28 income year, the new quarantine applies. The treatment is locked to the property, not the owner. If you sell a grandfathered property, the buyer does not inherit that status unless the property qualifies as a new build.

New Build Exemption and What Qualifies

New builds purchased after 12 May 2026 remain eligible for full negative gearing and the 50 per cent capital gains discount on future sale. A new build is defined as a dwelling constructed on previously vacant land or a development that increases the total number of dwellings on a site. A knock-down rebuild that replaces one house with one house does not qualify. A knock-down rebuild that replaces one house with two townhouses does qualify. Substantial renovations of an existing dwelling are excluded. A new build that is occupied for more than 12 months before being sold loses the exemption for the next purchaser. Off-the-plan apartments in new developments qualify, provided the buyer is the first to occupy or the dwelling has been occupied for less than 12 months before settlement. The exemption applies to the property itself and carries forward to subsequent owners as long as the 12-month threshold is not breached.

Repairs Versus Improvements and the Deductibility Line

Repairs that restore an asset to its previous condition are immediately deductible. Improvements that increase the value or functionality of the property must be depreciated or added to the cost base for capital gains purposes. Replacing broken floor tiles with identical tiles is a repair. Upgrading from laminate to stone benchtops is an improvement. Repainting a room in the same colour after a tenant vacates is a repair. Adding a second bathroom is an improvement. Repairs completed before the property is first rented are treated as capital and are not immediately deductible. If you purchase a property requiring significant remediation and complete that work before listing it for rent, those costs form part of your acquisition cost base, not a deductible repair. Once the property is tenanted or available for rent, repairs are deductible in the year incurred.

Depreciation on Fixtures, Fittings and Building Costs

Depreciation on the building structure and fixed assets within the property is claimable if the property was built after 15 September 1987. Plant and equipment items such as ovens, air conditioners, blinds and carpets can be depreciated regardless of the building's age, provided you purchased them new or the property itself was purchased new. Depreciation on second-hand plant and equipment in properties purchased after 9 May 2017 is no longer deductible unless the property is a new build. A quantity surveyor prepares a depreciation schedule that sets out the claimable amounts each year. The cost of the schedule itself is immediately deductible. Depreciation does not require a cash outlay but reduces your cost base for capital gains tax purposes when you sell.

How the Capital Gains Tax Changes Apply to Properties Purchased Now

From 1 July 2027, capital gains on affected properties are taxed using cost base indexation and a 30 per cent minimum rate, replacing the 50 per cent discount for the portion of the gain accruing after that date. Properties owned before 1 July 2027 and sold afterward are taxed under a split method. Gains up to 1 July 2027 use the existing 50 per cent discount. Gains after that date are indexed to inflation and taxed at the higher of your marginal rate or 30 per cent on the real gain. You can either obtain a market valuation at 1 July 2027 or use an ATO apportionment formula to split the gain. New builds retain the option to choose between the old 50 per cent discount and the new indexed treatment at the time of sale, allowing you to select whichever delivers the lower tax. If you purchase an established property now, the indexed method will apply to gains accruing from 1 July 2027. The shift does not affect the deductibility of holding costs, but it changes the after-tax return on sale.

Structuring Multiple Properties and Quarantining Losses Across a Portfolio

From the 2027-28 income year, losses from affected properties can be offset against income from other residential properties, including rental profits and capital gains. If you hold one negatively geared property acquired after 12 May 2026 and one positively geared property, the loss from the first can offset the profit from the second. Losses can also offset capital gains on residential property sales in the same year or future years. Excess losses are carried forward indefinitely and remain available to offset future residential property income. The quarantine does not apply across asset classes. You cannot offset a residential property loss against share dividends or commercial property rent. If you are building a portfolio, the sequencing of purchases affects your tax position. A data analyst acquiring a second investment property might prioritise a new build to preserve full negative gearing, or target a property in an area with low vacancy and strong rental yield to generate positive income that absorbs losses from existing holdings.

The tax settings for investment loans changed materially in May 2026, and the distinction between grandfathered properties, new builds and affected established properties will shape portfolio returns for decades. Deductions on interest, fees, repairs and depreciation remain available, but the ability to offset losses against salary now depends on what you buy and when you bought it. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions