Smart ways to approach tax deductions on investment loans

What you can claim right now on investment property borrowing costs

Interest on borrowing used to acquire or hold a rental property is deductible against your total assessable income, along with other holding costs like council rates, insurance, property management fees and repairs. That applies for the period your property is rented or genuinely available for rent.

Consider an investor in Hamlyn Terrace who purchased an older townhouse near Warnervale Station as a rental in late 2023. The property was funded with an interest-only loan at a variable rate, alongside a line of credit secured against their owner-occupied home to cover the deposit and settlement. Both interest charges are deductible because both facilities were used to acquire and hold the investment. The investor also claimed their building and contents insurance, quarterly water and council rates, property management fees and the cost of replacing a faulty hot water system. Combined with depreciation on fixtures and fittings, the rental income fell well short of total deductions. That shortfall, known as negative gearing, reduced the investor's taxable income from employment by several thousand dollars that year, lowering their overall tax liability.

If you've borrowed for a private purpose and secured that loan against an investment property, the interest on that borrowing is not deductible. The security doesn't determine deductibility. The use of funds does. Mixing purposes within a single loan facility creates complications at tax time, so keeping investment borrowing separate from personal borrowing is the cleaner approach.

How recent legislation changes what you can claim from the 2027-28 tax year

From the 2027-28 income year, losses on established residential investment properties purchased after 7:30pm AEST on 12 May 2026 can only be offset against income from other residential properties, including capital gains on residential properties. Losses that exceed your residential property income in a given year can be carried forward and used against residential property income in future years.

Properties already held on 12 May 2026, or under contract awaiting settlement at that time, are grandfathered and continue under the previous rules until sold. If you purchased an eligible new build after that date, full negative gearing against all income remains available. An eligible new build is a dwelling constructed on vacant land or a development that increases the total number of dwellings on the site. Knock-down rebuilds that don't add dwelling numbers, and substantial renovations, don't qualify.

Hamlyn Terrace sits within a corridor of steady residential growth between Warnervale and Wadalba, with a demographic that includes both young families and investors targeting rental demand from the expanding commuter base along the rail line. Investors in the suburb looking at established stock need to understand how the timing of their purchase interacts with the changed treatment of rental losses. Properties acquired before mid-May 2026 retain full offset rights. Properties purchased after that date do not, unless they qualify as new builds.

Interest-only versus principal and interest for tax purposes

An interest-only loan structure maximises your annual interest deduction because the loan balance does not reduce over the interest-only period. A principal and interest loan reduces the outstanding balance each month, which lowers the interest charged and therefore the amount you can claim. From a tax perspective alone, interest-only offers a larger deduction each year.

That said, repayment type is only one factor in the overall investment loan decision. Interest-only loans generally come with higher interest rates than principal and interest loans, and the interest-only period is typically capped at five years, after which the loan converts to principal and interest unless you apply to extend. Under APS 112, long-term interest-only loans above 80 per cent LVR where the interest-only period exceeds five years or is not specified are classified as non-standard, which affects how lenders assess capital and pricing. Lenders also apply higher scrutiny to interest-only applications, particularly where the investor already holds multiple properties or the loan sits above 80 per cent LVR.

What happens when you hold borrowing across both variable and fixed rates

Splitting your investment loan between variable and fixed rates doesn't change the deductibility of interest. Both portions remain deductible provided the funds were used to acquire or hold the rental property. Where the split becomes relevant is in how you manage offset accounts and prepayments.

Offset accounts linked to the variable portion of your loan reduce the interest charged on that portion, which in turn reduces your deduction. That might sound counterproductive, but in practice the dollar-for-dollar interest saving on an offset usually outweighs the lost tax benefit, particularly at higher marginal tax rates. If you're holding surplus cash for upcoming property expenses or as a buffer against vacancy, an offset account on the variable split gives you full access while still reducing your interest cost.

Fixed rate portions don't allow offset or redraw in most cases. That makes them useful for locking in a portion of your borrowing cost where you don't expect to hold surplus funds, but it also means any extra cash needs to sit elsewhere. Some investors working with us hold a fixed portion to smooth budgeting and a variable portion with offset to manage liquidity. The interest on both portions is claimable in full.

Capital gains tax treatment under the new indexed cost base rules from July 2027

From 1 July 2027, the 50 per cent capital gains tax discount for individuals on residential investment properties is replaced by cost base indexation and a 30 per cent minimum tax rate on real gains accruing from that date. You index the cost base of your property in line with inflation and pay tax only on above-inflation gains.

For properties owned before 1 July 2027 and sold after that date, gains are split. The portion accruing before 1 July 2027 is taxed under the old 50 per cent discount rules. The portion accruing after that date is taxed under the new indexed rules. You can either obtain a market valuation as at 1 July 2027 or use an ATO apportionment formula to divide the gain. Investors in eligible new builds can choose between the old 50 per cent discount and the new indexed treatment at the time of sale, whichever produces the lower tax outcome.

The 30 per cent minimum rate applies only to the post-July 2027 indexed portion of a gain, and only where your effective tax rate on that portion would otherwise fall below 30 per cent. If you're receiving certain government payments such as the Age Pension or Disability Support Pension in the year of disposal, the minimum rate does not apply.

How loan structure affects what you can claim when you refinance or release equity

Refinancing an existing investment loan to access a lower rate or better loan features doesn't change the deductibility of interest, provided the new borrowing is still used to hold the same investment property. Interest on the refinanced loan remains fully deductible.

If you refinance and increase the loan amount to release equity, deductibility depends entirely on how that released equity is used. Equity drawn down and used to purchase another investment property, or to fund deductible expenses on the original property, produces deductible interest. Equity used for private purposes such as renovating your own home, buying a car or funding a holiday produces interest that is not deductible, even though the security is still the investment property. Lenders don't track the use of funds for tax purposes. That responsibility sits with you. Keeping separate loan splits for different purposes, with clear documentation of how funds were applied, makes record-keeping and claiming far more straightforward. A refinancing conversation should include how you plan to use any equity release and how that affects your deductions.

What other property expenses are deductible and how to keep records

Beyond interest, ongoing costs deductible in the year they're incurred include council rates, water charges, strata levies, landlord insurance, property management fees, repairs and maintenance, pest control, gardening and lawn mowing for the period the property is tenanted or available for rent. Advertising for tenants, lease preparation costs and depreciation on plant and equipment such as appliances, blinds and carpets are also claimable.

Capital improvements such as adding a second bathroom, extending a deck or installing new kitchen cabinetry are not immediately deductible. They're added to the property's cost base and reduce your capital gain when you sell. Repairs that restore something to its previous condition, such as fixing a broken fence or repainting a damaged wall, are deductible in the year the work is done. If you're unsure whether an expense is a repair or an improvement, the ATO provides detailed guidance and examples, but in borderline cases a conversation with a tax specialist will clarify the treatment.

Keep all invoices, receipts, bank statements and loan statements. The ATO can request records going back five years, and in some cases longer. A spreadsheet that tracks each expense by category, matched to the supporting document, will save hours at tax time and hold up under review.

Why the numbers matter more now for Hamlyn Terrace investors

Hamlyn Terrace has seen consistent demand from renters drawn to proximity to Warnervale Station, Warnervale Town Centre and the M1 corridor, alongside relatively lower entry prices compared to other Central Coast suburbs closer to the water. Investors who purchased in the suburb over the past several years have generally experienced stable occupancy and moderate capital growth. For those considering a purchase now, particularly of established stock, the changed negative gearing and capital gains treatment from the 2027-28 tax year shifts the after-tax return profile. Rental yields need to be modelled not just against current interest costs but against the reduced ability to offset losses against employment income. Our team works through those projections with investors before they commit, so the decision is made on numbers that reflect the actual tax position, not assumptions that no longer apply. For a clearer picture of what you can claim and how the timing of your purchase affects your tax position, call one of our team or book an appointment at a time that works for you.

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