Top tips to maximise tax deductions on investment loans

What counts as deductible on an investment loan

Interest on borrowings used to acquire or hold rental property is deductible against your assessable income, provided the property is rented or genuinely available for rent. If you borrow $500,000 at a variable rate to buy a rental property in Campbelltown, the entire interest portion of your repayments can be claimed. If you redraw $20,000 from that same loan to renovate your own home, the interest on that $20,000 becomes private and loses its deduction.

The line between deductible and non-deductible is drawn by how the borrowed funds are used, not what security you offer. A borrower who takes out an investment loan secured against a rental property but uses the funds to buy a car cannot claim the interest. Conversely, a borrower who uses funds from a loan secured against their own home to purchase an investment property can claim that interest in full.

Offset accounts complicate this further. Money sitting in an offset reduces the interest you pay, which in turn reduces the amount you can claim as a deduction. In our experience, investors who want to maximise deductions often keep their offset linked to a non-deductible owner-occupied loan and pay down the investment loan more slowly.

Negative gearing rules for properties bought before and after May 2026

Negative gearing allows you to deduct rental property losses against other income, including your salary. For properties held at 7:30pm on 12 May 2026, or for new builds acquired after that date, you can continue to claim losses against all income until you sell. For established properties bought after 12 May 2026, losses can only be offset against income from other residential properties or carried forward to future years.

Consider a buyer who purchased an established townhouse in Campbelltown in August 2026. The property generates $480 per week in rent, while the loan interest, strata fees, council rates and insurance total $650 per week. That $170 per week loss cannot be deducted against wage income. It can only offset gains from another investment property or be banked to reduce capital gains tax when the townhouse is eventually sold.

If that same buyer had instead purchased a newly constructed apartment in Campbelltown completed in late 2026, the negative gearing treatment would mirror the old rules. Losses remain fully deductible against salary, which makes the holding cost of a new build lower for someone on a higher marginal tax rate.

How to structure your loan to protect deductibility

Deductibility depends on purpose, so clean loan structures matter. If you plan to access equity later for private use, split your borrowing from the start. One loan covers the investment property purchase. A second loan, drawn at the time you need it, covers the non-deductible expense. Mixing the two in a single loan account turns every repayment into a partial deduction and creates an ongoing record-keeping burden.

Some lenders allow you to establish multiple splits within a single facility, each with its own balance and purpose. A Campbelltown investor refinancing to access equity for a second property might establish three splits under one facility: one for the original investment property, one for the equity release to fund the new deposit, and one for owner-occupied debt. Each split maintains its own interest deduction profile.

Redraw facilities introduce risk. Every time you redraw and re-advance, the ATO expects you to demonstrate what those funds were used for. A borrower who redraws $15,000 from an investment loan for a holiday, then re-contributes $15,000 from savings six months later, has not restored deductibility on that portion. The original private use taints it. If you need flexibility, consider a separate line of credit rather than redrawing from the investment loan.

Interest-only loans and how they affect your return

An interest-only loan keeps your repayment lower, which increases your cash flow and maximises the interest deduction in the early years. A $600,000 loan at current variable rates on a principal and interest structure might cost around $3,800 per month. The same loan on interest-only terms might cost $2,900 per month. That $900 difference stays in your pocket each month, and the full $2,900 remains deductible.

Interest-only terms are typically approved for up to five years on a residential investment loan. Beyond that, most lenders require the loan to revert to principal and interest unless it is held in a self-managed super fund or meets specific portfolio lending criteria. Investors in Campbelltown holding multiple properties often stagger their interest-only periods so that not all loans revert to principal and interest in the same year.

The trade-off is straightforward. You pay more interest over the life of the loan because the balance does not reduce. Your equity grows only through capital growth, not repayment. For investors focused on portfolio growth rather than debt reduction, that trade-off makes sense. For those closer to retirement or holding properties in areas with lower growth expectations, paying down principal might deliver better long-term value.

What other expenses you can claim beyond interest

Council rates, water rates, strata levies, landlord insurance, property management fees, repairs, and depreciation on the building and fixtures all count as deductible expenses when the property is rented or available for rent. Borrowing costs, including lender application fees, valuation fees, and loan establishment costs, can be deducted over five years or the life of the loan, whichever is shorter.

Lenders mortgage insurance premiums are deductible in the same way if the loan is used to purchase or refinance an investment property. For a Campbelltown investor borrowing at 90 per cent loan to value ratio, LMI might add $15,000 to $25,000 to the upfront cost. That premium can be capitalised into the loan and claimed as a deduction over five years, which reduces the effective after-tax cost.

Repairs and maintenance are deductible in the year they occur, but capital improvements must be depreciated over time. Replacing a broken hot water system is a repair. Installing a new kitchen is a capital improvement. Landlords in Campbelltown with older properties often see higher deductible repair costs in the first few years after purchase, which can temporarily push a property further into negative gearing territory.

Capital gains tax changes from July 2027

From 1 July 2027, the 50 per cent capital gains discount on residential investment properties is replaced by cost base indexation and a 30 per cent minimum tax rate on real gains. You index your purchase price and eligible costs in line with inflation, then pay tax only on growth above that indexed amount. If you bought a Campbelltown investment property for $650,000 and inflation adds 15 per cent over your holding period, your indexed cost base becomes $747,500. Only gains above that figure are taxable.

For properties owned before 1 July 2027 and sold afterwards, gains are split. The portion accruing before 1 July 2027 is taxed under the old 50 per cent discount. The portion accruing from 1 July 2027 onwards is taxed under the new indexed system. Investors can choose between a formal market valuation at 1 July 2027 or an ATO-published apportionment formula.

New builds retain access to both the old 50 per cent discount and the new indexation method, and you can choose whichever delivers the lower tax bill when you sell. That choice makes new builds in growth areas like Edmondson Park and Oran Park particularly appealing for long-term holds, where inflation indexing may outperform the old discount in later years.

When to review your loan structure with your broker

Loan structures should be reviewed whenever your circumstances or the legislation changes. Refinancing to access equity, selling one property and buying another, or switching from interest-only to principal and interest all create moments where poor structuring can cost you thousands in lost deductions. A Campbelltown investor who refinances without splitting their loan correctly might inadvertently blend deductible and non-deductible debt, which creates ongoing compliance issues and reduces claimable interest.

If you purchased an established investment property after May 2026 and you are still negatively geared, carrying those losses forward makes sense only if you plan to acquire more residential property or realise a capital gain in future years. Some investors in that position may choose to accelerate depreciation claims, delay discretionary repairs, or switch to principal and interest repayments to reduce the loss and improve cash flow.

Your borrowing capacity for future purchases is also shaped by how your existing loans are structured. Lenders assess rental income at 80 per cent of market rent to account for vacancy and assess interest-only loans as though they were principal and interest when calculating serviceability. A broker familiar with investment lending can model different structures before you commit, so you retain the flexibility to grow your portfolio without hitting serviceability limits prematurely.

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