Investment Loans and Tax: What to Claim and What Changed

Interest on an investment loan is deductible against your rental income, and if your expenses exceed that income, the loss can offset your other earnings.

That's the fundamental tax benefit of property investment in Australia, though the rules governing exactly how much you can claim and when you can claim it shifted significantly from mid-2026. For Sydney investors weighing up their next purchase or reviewing an existing portfolio, knowing which properties fall under which rules makes the difference between structuring a loan that builds wealth efficiently and one that creates unnecessary friction at tax time.

How Interest Deductions Work on Investment Property Loans

Interest is deductible to the extent the loan is used to acquire or hold property that produces assessable income. If you borrow $600,000 to purchase a rental property in Parramatta and the property is tenanted or genuinely available for rent, the full interest cost can be claimed against your income. If you draw on the same loan to renovate your own home, that portion of the interest is private and non-deductible, regardless of the security provided.

Consider an investor who refinances an investment loan and pulls out $50,000 in equity to fund a holiday. The interest attributable to that $50,000 is not claimable. Lenders don't separate the two purposes on your statement, so you'll need to track the split yourself and claim only the portion that relates to income-producing activity. The loan amount itself doesn't determine the deduction. The use of the funds does.

Negative Gearing Before and After the Tax Changes

Negative gearing means your deductible expenses, including interest, exceed your rental income, creating a loss you can offset against salary or other income. For properties you owned or had under contract by 7:30pm on 12 May 2026, that treatment continues unchanged until you sell. The same applies to new builds purchased after that date, defined as dwellings constructed on vacant land or developments that increase the total number of dwellings on a site.

For established properties purchased after 12 May 2026, losses from the 2027-28 income year onward can only be offset against other residential property income, including capital gains on residential property. Those losses carry forward indefinitely, but they no longer reduce your taxable salary. An investor who settles on an established apartment in Auburn in late 2026 and makes a $12,000 annual loss cannot claim that loss against their wage until they sell the property or acquire additional rental income from another residence.

Capital Gains Tax Treatment From July 2027

Gains accruing before 1 July 2027 continue to attract the 50 per cent discount for assets held longer than 12 months. Gains accruing from 1 July 2027 onward are taxed under a new system where you index your cost base to inflation and pay a minimum 30 per cent rate on the real gain, unless you qualify for a government payment exemption in that financial year.

If you purchased a property in Granville in early 2026 for $750,000 and sell it in 2029 for $900,000, the gain is split. The portion accruing to 1 July 2027 is taxed under the old discount rules. The portion from July 2027 to the sale date is indexed for CPI and taxed under the new minimum rate. You can either obtain a market valuation as at 1 July 2027 or use the ATO apportionment formula. Investors buying eligible new builds can choose between the 50 per cent discount and the indexed treatment at the time of sale, whichever delivers the lower tax.

What Else You Can Claim Beyond Interest

Council rates, strata levies, insurance, property management fees, repairs and depreciation on plant and equipment are all deductible for the period the property is rented or genuinely available for rent. Depreciation on the building itself, known as capital works, is claimable at 2.5 per cent per year for properties constructed after 1987, provided you obtain a quantity surveyor's report. Costs incurred while the property is vacant between tenants remain deductible as long as you're actively marketing for a new tenant.

Loan establishment fees, valuation costs and LMI premiums are also claimable, though generally over the life of the loan rather than in a single year. Stamp duty and conveyancing costs are added to your cost base and reduce your capital gain when you sell, rather than being claimed annually. If you travel to inspect a property or meet with a property manager, those travel costs may be deductible depending on the primary purpose of the trip and how much time you spend on the investment activity.

Structuring Your Loan to Maximise Claimable Interest

An interest-only loan keeps your repayments lower during the interest-only period, which maximises your annual deduction and improves cash flow if you're negatively geared. Principal repayments are not deductible, so switching to principal and interest reduces the amount you can claim each year, even though the total interest paid over the life of the loan may be lower.

A variable rate loan gives you the flexibility to make extra repayments into an offset account without reducing your deductible loan balance. If you pay down the loan directly, your claimable interest drops. If you park extra cash in an offset, your interest cost falls but your loan balance and maximum claimable amount stay the same. That distinction matters when you might need to redraw funds for another investment or hold liquidity for vacancy periods without affecting your deduction.

How APRA Serviceability Rules Affect Investment Borrowing

Lenders assess your ability to service an investment loan at the loan rate plus a 3 percentage point buffer, applying that calculation to your total debt. If you're applying for a variable rate loan at 6.2 per cent, you'll be assessed at 9.2 per cent. Rental income is included, though lenders typically shade it by 20 per cent to account for vacancy and management costs.

From February 2026, lenders can only write 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or more. If your household income is $150,000 and you already have $750,000 in investment debt, your capacity to add another loan depends on whether the lender has room within that 20 per cent cap for that quarter. Non-bank lenders are not currently subject to the DTI limit, which can make them a viable option if you're above the threshold and your chosen bank has reached its quota.

Using Equity to Fund Your Next Purchase

If you own a property in Merrylands that has risen in value, you can borrow against that equity to fund the deposit and costs on your next investment. The interest on the equity release is deductible only if the funds are used for income-producing purposes. Pulling out $100,000 to buy another rental makes that interest claimable. Using it to pay off your owner-occupied home loan or fund renovations to your own residence does not.

Keep the two loans separate from the start. A split loan structure, where one split covers the original property and another split covers the equity drawdown, makes it straightforward to track which interest relates to which purpose. Mixing the funds in one account creates an apportionment problem that complicates your return and invites ATO scrutiny during an audit.

What Sydney Investors Should Know About LMI and Tax

LMI premiums are tax-deductible on investment property loans, either in full in the year you pay the premium or over five years if the loan term is five years or longer. Stamp duty on the LMI premium, which applies in New South Wales, is also deductible on the same basis. The premium itself is calculated on a sliding scale based on your loan amount and LVR, with most lenders requiring it when your deposit is below 20 per cent.

For an investment loan above 80 per cent LVR in Sydney, LMI can add several thousand dollars to your upfront costs, but claiming it as a deduction reduces the net impact. If you refinance your investment loan within the first few years and discharge the original loan, you can claim the balance of the deductible LMI amount in the year of discharge rather than continuing to spread it over the remaining term.

Call one of our team or book an appointment at a time that works for you to discuss how the current tax settings and lending rules apply to your situation and what that means for structuring your next investment loan.

Frequently Asked Questions