How to Use Tax Deductions on Your Investment Loan

Only the interest on your investment loan is deductible, not the whole repayment. That one point shapes how you should set up your loan, what you claim, and how you plan your cash flow. If you're a Campbelltown investor, or thinking of becoming one, here's how the deductions work and what has changed.

The tax rules below are general information only. Speak to your accountant about your own situation before you act.

What Can You Claim on an Investment Loan?

You can generally claim the interest on money borrowed to buy or hold a rental property, to the extent the property is rented or genuinely available for rent. The principal part of your repayment is not deductible, because it pays down the loan rather than costing you money.

Other holding costs are also claimable for the period the property is rented or available for rent. These include council rates, insurance, property management fees, repairs and depreciation. Your accountant can confirm exactly what applies to your property.

This is why the investment loan structure matters. Interest-only and principal and interest loans both produce deductible interest, but only the interest portion counts under either one.

Interest Only vs Principal and Interest: Which Gives a Bigger Deduction?

Neither structure automatically gives you a bigger deduction. Interest is the only deductible part under both, and the amount depends on your balance, your rate and your loan structure.

With interest-only, the balance stays the same, so the interest charged doesn't fall over that period. With principal and interest, the balance falls over time, so the interest charged usually falls too. You pay less interest, so there's less to claim. That's a good trade for most people, because a deduction only returns part of what you spend.

Interest-only also has a trade-off. Lenders assess your ability to repay over the shorter remaining term once the interest-only period ends. For a 30-year loan with a 5-year interest-only period, that's 25 years. So interest-only does not increase how much you can borrow. Higher repayments kick in later, and you haven't reduced the debt in the meantime.

How Do Offset Accounts Affect Your Deductions?

An offset account reduces the interest charged on your loan, so there's less interest to claim. It doesn't leave your deduction unchanged.

The trade-off is that you keep more cash working for you and pay less interest overall. The loan balance itself stays the same, so the loan amount doesn't change. It also doesn't reduce the loan for lender LVR purposes. Offset features and fees vary by lender, so compare them when you're reviewing investment loan options.

Why Using Equity for Personal Spending Can Cost You Deductions

The deductibility of interest depends on what you use the borrowed money for, not what property secures the loan. If you use equity from your investment property for something personal, the interest on that part is not deductible.

The ATO treats each drawdown or redraw as a separate borrowing, based on how you use the funds. Consider an investor with a single investment loan who redraws money for a family holiday. That slice of the loan now carries private-purpose interest. If they later claim all the interest, they've overclaimed.

The fix is to keep purposes separate. Use separate loan splits for investment and personal borrowing, and keep clear records. Your accountant can tell you how to treat mixed-purpose borrowing. If you're considering an equity release, ask your broker how to structure it before you draw any funds. A loan health check is a good time to review how your current loans are set up.

Negative Gearing Changes: What Applies to Your Property?

Whether negative gearing still works as it did depends on when you acquired the property and what type it is. Properties you held at 7:30pm AEST on 12 May 2026, including those under contract awaiting settlement, keep full deductibility of losses against other income, such as salary, until the property is sold.

Eligible new builds acquired after that date can also keep deducting losses against all income. From the 2027-28 income year, net rental losses on established residential properties acquired after that time are only deductible against other residential property income, including residential capital gains. Excess losses can be carried forward. Properties acquired between that time and 30 June 2027 can be negatively geared under the current rules until 30 June 2027 only.

This doesn't change whether interest is deductible. It changes what you can offset a loss against. That makes your rental income and cash flow more important, because you may not be able to rely on your salary to soak up a loss. Hold-cost buffers matter, and so does choosing a loan you can comfortably service.

Capital Gains Tax Changes From 1 July 2027

The 50 per cent CGT discount continues for gains on residential property accruing before 1 July 2027, if you're an individual, trust or partnership and held the asset for more than 12 months. From 1 July 2027, it's replaced by cost base indexation using CPI and a 30 per cent minimum tax rate on real gains accruing from that date.

For property you already own and sell later, the gain is split. The part accruing before 1 July 2027 follows the current rules. The part after follows the new rules. You can use a market valuation at 1 July 2027 or an ATO formula to work out the split.

The CGT discount doesn't apply to companies. Your accountant can model how this applies to your plans, especially if you're thinking about a longer hold or an eventual sale.

Worked Example: Interest Deduction on a Loan at an Illustrative 6.75%

On an illustrative loan of $500,000 at 6.75% p.a., the first year of interest is about $33,750 if the balance stays flat. Only that interest, not the full repayment, is claimable, subject to your accountant's advice.

Consider an investor who takes an interest-only loan for a Campbelltown-area rental. The interest bill is about $33,750 a year, and that's what goes into the tax return, along with rates, insurance and management fees. Say a principal and interest loan on the same amount at the same illustrative 6.75% rate. In year one, the interest is slightly lower because the balance starts falling immediately. The extra principal paid isn't claimable.

In year one, at the same illustrative rate, the interest-only loan carries slightly more interest (about $33,750) than the principal and interest loan (about $33,585), but you pay that extra interest as a real cost. Over time the deduction depends on your balance, rate and structure, so ask your accountant to model it. Run your own numbers with a calculator, and check how the rental income and costs sit alongside the loan.

Does Where You Buy Change Your Loan Options?

Your loan options depend on your lender's policy, your deposit and the property, not just the suburb. Lenders look at your serviceability, and APRA requires banks to test your repayments at a rate at least 3 percentage points above the loan rate.

For rental income, lenders under APRA guidance generally count no more than 80 per cent of expected rent. Your borrowing capacity depends on those rules and on existing debts, including credit card limits. If your deposit is under 20 per cent, you may also need Lenders Mortgage Insurance, which adds a cost.

If you already hold an investment loan, refinancing is another way to review your rate and structure. Weigh any discharge or valuation costs against what you'd gain.

Call one of our team or book an appointment at a time that works for you. We'll walk through your loan structure, your deductions and what the recent tax changes mean for your plans, alongside your accountant.

Frequently Asked Questions