Avoid These 7 Tax Mistakes on Investment Property Loans

Legislation that came into force on 26 June 2026 changed how losses on residential investment properties are treated from the 2027-28 income year onwards.

If you purchased an established investment property after 7:30pm AEST on 12 May 2026, losses can only be offset against other residential property income, not your salary. Properties held before that date, and new builds purchased any time, keep full deductibility. The shift affects how you structure a home loan and whether rentvesting still delivers the same after-tax return it used to.

Most buyers in Victoria still assume negative gearing works the way it always has. It doesn't, unless you're buying new or you bought before mid-May.

Claiming Losses Against Your Salary on Post-May Established Properties

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.

Consider a buyer who purchases an established apartment in Melbourne's outer suburbs in September 2026. Rental income is $22,000 a year. Interest on the investment loan is $28,000. Strata fees, council rates, and other holding costs add another $6,000. Total deductions are $34,000. Rental income is $22,000. The annual loss is $12,000. Under the previous rules, that $12,000 loss would reduce taxable income from salary, delivering a refund at the buyer's marginal tax rate. From the 2027-28 income year, the loss can only be used to offset income from other residential properties, such as rent from a second property or a future capital gain on sale. If there's no other residential property income that year, the loss is carried forward.

Properties purchased on or before 12 May 2026 retain full deductibility. New builds purchased at any time also retain full deductibility. The distinction turns on contract date and dwelling classification.

Assuming All New Builds Qualify for Full Deductibility

Not every property marketed as new qualifies for the exemption under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.

The legislation defines a new build as a dwelling that has not been previously sold as a place of residence or occupied for residential purposes. A property that has been lived in, even briefly, or previously sold to an owner-occupier does not meet the definition. A display home that was occupied for display purposes and then sold may not qualify, depending on how occupation is classified. An off-the-plan purchase where the developer rented the property out before settlement likely does not qualify. The ATO has not yet released a full ruling on edge cases, but the test is whether the dwelling has been used residentially before your purchase. If it has, it's treated as established.

Buyers structuring investment loans around the assumption of full deductibility need written confirmation from their conveyancer or solicitor that the property meets the new build definition before they sign.

Ignoring the Capital Gains Tax Change from 1 July 2027

From 1 July 2027, the 50 per cent CGT discount on residential investment property is replaced by cost base indexation and a 30 per cent minimum tax rate on gains accruing from that date.

Under the previous rule, an investor who held a property for more than 12 months paid tax on half the nominal capital gain at their marginal rate. From 1 July 2027, the cost base is indexed to inflation, and tax is paid on above-inflation gains only, but at a minimum rate of 30 per cent. For investors in new builds, both the 50 per cent discount and the new indexation treatment are available as a choice at sale. For investors in established properties purchased after 12 May 2026, only indexation applies to gains accruing from 1 July 2027 onwards.

The change affects sale timing and whether you hold or sell before mid-2027. It also changes the relative value of capital growth versus rental yield when you're comparing home loan products with different loan-to-value ratios and interest structures.

Structuring a Split Loan Without Understanding Deductibility Timing

A split loan divides the total borrowing into a fixed rate portion and a variable rate portion.

If part of your loan is fixed at a lower rate and part is variable, and you make extra repayments, those repayments reduce the variable portion first unless you specify otherwise. On an investment property, paying down the loan faster reduces the deductible interest you can claim. That was always true, but it mattered less when the loss could be offset against salary. Now that losses on post-May established properties are quarantined to residential property income only, reducing deductible interest early in the hold period means you're carrying forward losses with no immediate tax benefit, while simultaneously reducing the size of future deductions.

If you're using a split rate structure, confirm with your lender which portion of the loan will be reduced by any extra repayments, and model the tax effect before you make them.

Overlooking the Interaction Between DTI Limits and After-Tax Serviceability

From 1 February 2026, APRA activated a debt-to-income lending limit requiring ADIs to restrict lending above a DTI ratio of six times gross income to no more than 20 per cent of new loans in each portfolio.

For a buyer earning $100,000 a year, total borrowing above $600,000 may require an exception or a non-ADI lender, depending on the institution's current quarterly position. The limit applies separately to owner-occupier and investor lending. If you're a rentvester borrowing for an investment property, the DTI test uses your gross income but does not account for the fact that losses on post-May established properties no longer reduce your taxable income in the year they occur. Your after-tax cost of holding the property has increased, but your borrowing capacity under the DTI measure has not changed, because the DTI test does not adjust for tax treatment.

You may be approved for a loan amount that works under the DTI rule but leaves you with a larger after-tax shortfall than you expected once the new loss quarantine applies. Model your cash flow using after-tax income and after-tax holding costs, not just the serviceability buffer applied by the lender.

Using Offset Accounts on Investment Loans Without Considering Opportunity Cost

An offset account linked to an investment loan reduces the interest charged, which reduces the deductible interest you can claim.

If you hold $30,000 in an offset account linked to an investment loan at 6.5 per cent, you save $1,950 a year in interest. That saving is not taxable. If the interest were charged and claimed as a deduction, and you're on a marginal rate of 32.5 per cent, the after-tax cost of that $1,950 in interest would be $1,316. The offset saves you $1,950 but costs you $634 in lost deductions. Under the old rules, that trade-off was still often worth it because the offset provided liquidity and flexibility. Under the new rules, if the property is an established dwelling purchased after 12 May 2026, the $1,950 in interest is only deductible against other residential property income. If you have none, the deduction is carried forward, and the immediate value of the offset increases.

The optimal use of an offset account now depends on whether you have other residential property income in the current year, and whether you expect to realise a capital gain in the near term that could absorb carried-forward losses.

Choosing Between Owner-Occupied and Investment Classification Without Updated Advice

Loan classification affects the interest rate, the serviceability assessment, and the tax treatment of the borrowing.

An owner-occupied loan generally attracts a lower interest rate than an investment loan, but interest is not deductible. An investment loan attracts a higher rate, but interest is deductible. From the 2027-28 income year, that deduction is quarantined to residential property income if the property is an established dwelling purchased after 12 May 2026. If you're living in a property temporarily while renting it out later, or renting it out initially with a plan to move in, the loan classification and the tax treatment both change when your use changes. Lenders require notification of any change in occupancy status. Failing to notify the lender can result in a breach of your loan contract. Failing to notify the ATO can result in incorrect deductions and potential penalties.

If your circumstances or your intended use of the property changes, contact your lender and your accountant before the change takes effect, not after. The timing of the change affects which rules apply and how the loan should be structured going forward.

Call one of our team or book an appointment at a time that works for you. We work with buyers across Victoria who are structuring investment loans and owner-occupied purchases under the updated tax rules, and we'll walk you through how the changes apply to your situation and your timeline.

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