When to Claim Deductions on an Investment Loan

Interest Deductibility: How the Rules Apply

Interest on an investment loan is deductible when the borrowing is used to acquire or hold a property that generates assessable income. The deduction is available to the extent the property is rented or held for rental purposes, but interest on borrowings used for private purposes remains non-deductible regardless of the security provided.

In our experience, investors sometimes blur the line when they draw on equity for purposes unrelated to the investment. Consider an investor who refinances a Templestowe rental property to release equity. If that equity is used to renovate the investment property or purchase another rental, the interest remains deductible. If the same funds are used to buy a family car or pay for a personal renovation, the interest attributable to that portion is not claimable. Lenders do not track how you spend the funds, so the obligation to allocate interest correctly falls on the property owner and their accountant.

Negative Gearing: What Changes from July 2027

Under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, net rental losses from residential dwellings acquired on or after 7:30pm AEST on 12 May 2026 will be quarantined from 1 July 2027. These losses can only be offset against other residential rental income or carried forward to offset future residential rental income or capital gains. They cannot reduce salary, wages, or other non-residential income.

Properties held at 7:30pm AEST on 12 May 2026, including those under contract at that time, are grandfathered and may continue to be negatively geared under existing rules until sold. Properties acquired between 7:30pm AEST on 12 May 2026 and 30 June 2027 may be negatively geared under existing rules until 30 June 2027 only. From 1 July 2027, losses on those properties will also be quarantined unless the dwelling qualifies as an eligible new build.

Eligible new builds include dwellings constructed on previously vacant land and dwellings that replace existing properties where the number of dwellings increases. A knock-down rebuild that does not increase dwelling numbers does not qualify, nor does a substantial renovation. If a new build is occupied for more than 12 months before being sold to a subsequent investor, that subsequent purchaser loses access to unrestricted negative gearing.

Capital Gains Tax: Discount or Indexation

From 1 July 2027, the 50 per cent capital gains tax discount for individuals, trusts, and partnerships is replaced with cost base indexation using the Consumer Price Index and a minimum 30 per cent tax rate on real capital gains. Gains that accrued before 1 July 2027 on existing assets continue under current rules, so only gains accruing after that date are subject to the new arrangements.

For eligible new build residential properties, investors can elect between the 50 per cent discount and indexation with the 30 per cent minimum tax. The main residence exemption and the 60 per cent discount for qualifying affordable housing remain unchanged. Recipients of means-tested income support payments are exempt from the 30 per cent minimum rate in any financial year they receive such a payment.

The indexation approach may produce a lower taxable gain in a high-inflation environment compared to the fixed discount, but the 30 per cent minimum rate reduces flexibility for investors on lower marginal rates. The election is made at the time of sale, so investors with new builds retain optionality until disposal.

Other Deductible Expenses on Rental Properties

Beyond interest, property investors can claim ongoing costs such as council rates, water charges, building insurance, landlord insurance, property management fees, strata or body corporate levies, and repairs. Repairs refer to work that restores an item to its previous condition without improving it. Replacing broken roof tiles is a repair. Installing an entirely new roof is a capital improvement, which is added to the cost base and claimed through depreciation or at the time of sale as a cost base adjustment.

Legal fees and borrowing costs incurred when acquiring the property or refinancing an investment loan are deductible over five years or the loan term, whichever is shorter. Stamp duty and conveyancing fees are not deductible as ongoing expenses but form part of the cost base when calculating capital gains tax.

Templestowe properties often include established homes on larger blocks, and many investors hold these for extended periods. Depreciation on the building and fixtures can be claimed where a quantity surveyor's report is commissioned, though depreciation on plant and equipment in second-hand properties was removed for contracts entered after 9 May 2017. Investors acquiring properties constructed after 1985 should obtain a depreciation schedule early in the ownership period.

Loan Structure and Deductibility

The structure of an investment loan affects both serviceability and tax outcomes. Interest-only repayments maximise the deductible interest component in the early years of ownership and preserve cash flow, but principal-and-interest repayments reduce the outstanding balance and therefore the interest paid over time. Principal repayments are not deductible, so the total deduction decreases as the loan is paid down.

Split loans, where part of the facility is fixed and part variable, introduce complexity when funds are redrawn. If the variable portion is drawn for a non-deductible purpose, the interest on that portion loses deductibility even though the security remains the investment property. Lenders typically allow redraw on the variable portion but not the fixed portion, and most do not separately track the purpose of redrawn funds. Investors who anticipate future equity release for another investment should consider a separate split at the outset rather than commingling purposes within a single facility.

For clients considering refinancing to access equity or secure a lower rate, the key question is whether the new borrowing relates to an income-producing purpose. If the entire increased loan amount is used to acquire another rental property or undertake capital works on the existing investment, the full interest remains deductible. If part of the refinance funds a private expense, only the portion attributable to the investment is claimable.

APRA Settings and Borrowing Capacity

From 1 February 2026, APRA introduced a debt-to-income cap that limits the proportion of new investor loans that can be written at a DTI of six times or greater to 20 per cent of each lender's investor portfolio. This sits alongside the existing serviceability buffer of three percentage points above the product rate. Finance for the construction of new dwellings, the purchase of newly erected dwellings, and bridging finance for owner-occupiers is exempt from the DTI cap.

The DTI cap affects investors with high incomes and low deposits more than those with substantial equity, because the measure looks at total debt across all properties rather than the loan-to-value ratio on a single property. An investor with rental income from existing properties may find serviceability constrained if total debt exceeds six times household income, even where equity and rental yield are strong. This makes the choice between principal-and-interest and interest-only repayments, and the decision to hold or sell underperforming assets, more consequential than in previous years.

For Templestowe investors, median household incomes in the area and the borrowing capacity available from lenders will determine whether additional purchases are viable under the current settings. Investors planning to acquire a second or third property should model their position before committing to a purchase contract.

When Professional Advice Becomes Necessary

Tax and regulatory changes since mid-2026 mean that the deductibility, quarantining, and capital treatment of investment property expenses now depend on acquisition date, property type, and future disposal timing. Investors who acquired properties before 12 May 2026 retain access to existing rules, but those acquiring from that date forward face quarantined losses unless the property is a qualifying new build. The interaction between negative gearing quarantining, capital gains tax indexation, and APRA serviceability settings requires scenario modelling that goes beyond general guidance.

A licensed tax adviser can allocate interest between deductible and non-deductible purposes where funds have been commingled, quantify the benefit of depreciation, and model the election between discount and indexation at the time of sale. A mortgage broker can structure loan facilities to preserve deductibility and assess whether a proposed purchase satisfies lender serviceability tests under current APRA settings. Both roles have become more technical following the recent legislative changes.

If you are acquiring an investment property in Templestowe or considering a refinance to release equity, call one of our team or book an appointment at a time that works for you. We work with property investors across the eastern suburbs and can connect you with the right loan structure and the right tax specialist for your circumstances.

Frequently Asked Questions