The Pros and Cons of Investment Loan Tax Deductions

What You Can Still Claim on an Investment Loan

Interest on borrowings used to acquire or hold a rental property remains tax deductible when the property produces assessable income. This applies whether you choose an interest-only or principal-and-interest loan structure. You can also claim ongoing costs including property management fees, building depreciation, council rates, landlord insurance, repairs and maintenance, and body corporate fees.

Consider a buyer who purchases a two-bedroom unit in Hampton's central precinct. The property generates rental income of around $2,100 per month. With an investment loan of $650,000 at current variable rates, annual interest costs might reach $42,000. That interest is fully deductible, along with annual body corporate fees of roughly $3,500, council rates of $2,200, and insurance and property management costs that typically add another $4,000 combined. These claimable expenses reduce taxable income by around $51,700 each year.

This calculation assumes the property is rented or genuinely available for rent. If you use the property for private purposes at any point during the year, you need to apportion deductions accordingly. Interest on any portion of the loan used for non-investment purposes is not claimable, even if the security is the investment property itself.

How Negative Gearing Rules Change From July 2027

From 1 July 2027, net rental losses on residential properties acquired after 7:30pm AEST on 12 May 2026 can only be offset against other residential rental income or carried forward. They cannot be offset against salary, wages or other non-residential income. Properties already held at that date, including those under contract awaiting settlement, continue under existing negative gearing arrangements until sold.

The change affects how you structure your property investment strategy if you're planning to buy additional rental properties. In a scenario where rental income falls short of deductible expenses by $15,000 in a financial year, that loss can still reduce your tax, but only if you hold other rental properties generating a profit or if you carry the loss forward to offset future rental income or capital gains on residential property. It no longer reduces tax on employment income.

Eligible new builds remain exempt. A dwelling constructed on previously vacant land, or a property where the number of dwellings increases, can still be negatively geared in the traditional way. A knock-down rebuild that does not add to dwelling numbers does not qualify. If a new build is occupied for more than 12 months before being sold to a subsequent investor, that investor loses access to negative gearing.

Interest-Only Versus Principal-and-Interest for Tax Purposes

Both loan structures allow you to claim the interest component as a deduction. The difference lies in cash flow and how quickly you reduce debt.

An interest-only investment loan keeps repayments lower during the interest-only period, which can improve cash flow if rental income does not cover all holding costs. The entire repayment is deductible. A principal-and-interest loan requires higher repayments, but only the interest portion is claimable. The principal repayment builds equity but does not reduce your taxable income.

In our experience, buyers in Hampton who hold multiple properties or plan to access equity for further purchases often favour interest-only periods to preserve cash and maintain flexibility. Those focused on reducing debt ahead of retirement tend towards principal-and-interest from the outset. Neither approach changes the total interest you can claim over the life of the loan, assuming the investment loan balance and rate remain constant.

What Happens When You Refinance an Investment Property

Refinancing to secure a lower interest rate or access equity does not change the deductibility of interest, provided the funds remain invested for income-producing purposes. If you refinance and draw additional equity to purchase another investment property, the interest on that additional borrowing is also deductible. If you use the equity for private purposes, such as renovating your own home or buying a car, that portion of the interest is not claimable.

Lenders assess an investment loan refinance using rental income to support serviceability. They typically apply a vacancy rate and other adjustments when calculating how much rental income counts towards your borrowing capacity. Hampton's relatively low vacancy rate and consistent demand from both families and professionals near the beach and rail line can work in your favour during that assessment, though lenders apply their own discounts regardless of local conditions.

Capital Gains Tax and the New Indexation Rules

From 1 July 2027, the 50 per cent capital gains tax discount is replaced with cost base indexation and a minimum 30 per cent tax rate on real gains for properties acquired after that date. Gains accrued before 1 July 2027 on properties you already own remain under current rules, so only the portion of the gain attributable to the period after that date is subject to the new treatment.

For eligible new builds, you can elect between the 50 per cent discount and indexation with the minimum rate. The main residence exemption is unaffected. If you receive a means-tested income support payment in a financial year, you are exempt from the 30 per cent minimum rate in that year.

The change shifts the calculation for long-term portfolio growth. Indexation benefits investors who hold properties through extended periods of inflation, as the cost base increases with the Consumer Price Index, reducing the real gain subject to tax. The minimum rate targets higher-income investors who previously benefited from lower marginal rates when applying the 50 per cent discount.

Claiming Expenses When the Property Is Vacant

You can continue to claim deductions during vacancy periods if the property is genuinely available for rent and you are taking reasonable steps to find a tenant. Interest, rates, insurance and other holding costs remain deductible. If you withdraw the property from the rental market for personal use or leave it vacant without attempting to lease it, deductions for that period are not allowable.

Hampton's rental market, supported by proximity to the beach, Bay Street retail precinct and direct train access to the CBD, typically sees shorter vacancy periods than outer suburbs. That does not eliminate vacancy risk entirely, but it does mean most landlords can demonstrate genuine availability without extended gaps in rental income.

How Lenders Mortgage Insurance Affects Investment Loan Deductions

Lenders Mortgage Insurance is a one-off cost, usually capitalised into the loan amount when your deposit falls below 20 per cent of the property value. The premium itself is not immediately deductible. If you borrow the LMI premium as part of your investment loan, the interest on that portion of the borrowing is deductible over time, just like the rest of the loan. If you pay the premium upfront in cash, you can claim a deduction for the premium spread over five years or the term of the loan, whichever is shorter.

The distinction matters when comparing investment loan options with different loan-to-value ratios. A higher deposit avoids LMI entirely and reduces your interest cost, but it also ties up more capital that could be deployed elsewhere. Whether the tax treatment of LMI and interest justifies a smaller deposit depends on your broader strategy and cash position.

Tax Deductions Do Not Replace Rental Yield

Deductions reduce the after-tax cost of holding a property, but they do not generate income. A property that produces strong rental yield relative to the purchase price will perform better after tax than a property with weak yield, even if both offer the same deductions.

Buyers focused on maximising tax deductions sometimes overlook this. A property in Hampton that rents for $2,100 per month on a purchase price at the suburb's current median will deliver both rental income and deductible expenses. A property in a lower-demand area with similar deductible costs but rental income of only $1,600 per month leaves you further out of pocket each year, regardless of how much you can claim.

The value of deductions also depends on your marginal tax rate. An investor on the top marginal rate receives a larger benefit from the same deduction than an investor on a lower rate. If your income fluctuates or you expect to move to a lower tax bracket in coming years, the benefit of negative gearing diminishes.

Call one of our team or book an appointment at a time that works for you. We'll review your borrowing capacity, walk through the tax treatment of different loan structures, and help you access investment loan options from banks and lenders across Australia that align with your circumstances and the new legislative settings.

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