The Pros and Cons of Investment Loan Tax Deductions

Every deduction you claim on an investment property reduces your taxable income, but the rules changed in mid-2026 and the impact depends entirely on when you bought.

If you purchased before 7:30pm on 12 May 2026, you can still offset your rental loss against salary and wages until you sell. If you bought after that date, from 1 July 2027 your losses will be quarantined and can only offset other residential rental income or future capital gains. The practical difference for a Melbourne investor holding a negatively geared property is whether you get tax relief this year or years down the track.

What You Can Deduct Right Now on Any Investment Loan

Interest on borrowings used to acquire or hold a rental property is deductible to the extent the property is rented or genuinely available for rent. That applies to all investment properties regardless of purchase date.

Consider an investor in Footscray who refinanced to access equity and used the funds to cover holding costs on a second property in Werribee. The interest on the refinanced portion is only deductible if those funds were used for income-producing purposes. Interest on borrowings for private use is never deductible, even if the loan is secured against the investment property.

Other ongoing costs such as council rates, landlord insurance, property management fees, strata levies, repairs and maintenance, and depreciation on fixtures and fittings are also deductible during the period the property is rented or advertised for rent. If the property sits vacant without being genuinely available, you lose the deduction for that period.

Negative Gearing for Properties Bought Before 12 May 2026

Properties held at 7:30pm on 12 May 2026 continue under the existing negative gearing rules until sold.

In a scenario where a Melbourne investor bought an apartment in Docklands in March 2026 with an interest-only loan at 6.2 per cent, annual interest of around $24,000 and rental income of $20,000 would produce a $4,000 net loss once other holding costs are included. That loss can be deducted against the investor's salary, reducing taxable income and generating a tax refund each year the property remains negatively geared. When sold, the investor will also receive the existing 50 per cent capital gains discount on any gain, provided the property was held for at least 12 months.

This grandfathering applies even if you refinance, switch lenders, or extend the term on the same property. The key date is acquisition, not loan origination.

Negative Gearing for Properties Bought After 12 May 2026

From 1 July 2027, net rental losses on residential properties acquired after 7:30pm on 12 May 2026 are quarantined.

Losses can only be offset against other residential rental income in the same year, or carried forward to offset future residential rental income or future capital gains on residential property. They cannot be offset against salary, wages, or other non-residential income. An investor who buys a townhouse in Reservoir in September 2026 and incurs a $5,000 annual loss will not receive any immediate tax benefit unless they also own another positively geared residential property. The loss accumulates and reduces tax payable when the property is eventually sold or when rental income exceeds expenses.

Properties purchased between 12 May 2026 and 30 June 2027 can be negatively geared under the old rules until 30 June 2027, then fall under the new quarantine from 1 July 2027 onward.

The Exemption for Eligible New Builds

Eligible new residential dwellings are exempt from the negative gearing quarantine and continue to allow losses to be offset against other income.

An eligible new build is a dwelling constructed on previously vacant land or a development that increases the total number of dwellings on a site. A knock-down rebuild that replaces one house with another single dwelling does not qualify. Neither does a substantial renovation. If the new build is occupied for more than 12 years before being sold to a subsequent investor, that subsequent purchaser loses access to the exemption.

For Melbourne investors considering house and land packages in growth corridors such as Clyde North or Wyndham Vale, the new build exemption preserves the ability to claim rental losses against salary in the early years when the property is typically negatively geared. The exemption also extends to the capital gains treatment: investors in eligible new builds can choose either cost base indexation with a 30 per cent minimum tax rate or the existing 50 per cent CGT discount when they sell.

Capital Gains Tax Changes from 1 July 2027

From 1 July 2027, the 50 per cent CGT discount is replaced with cost base indexation using the Consumer Price Index and a minimum 30 per cent tax rate on real capital gains.

For properties owned before 1 July 2027 and sold after that date, the gain is split. The portion accruing before 1 July 2027 is taxed under the existing 50 per cent discount, and the portion accruing after 1 July 2027 is indexed and taxed at a minimum 30 per cent. Investors can either obtain a market valuation as at 1 July 2027 or apply an ATO apportionment formula to split the gain.

Recipients of means-tested income support payments such as the Age Pension or JobSeeker are exempt from the 30 per cent minimum rate in any financial year they receive such a payment. Investors planning to hold property into retirement should factor this into their long-term tax position.

How Interest-Only Loans Affect Your Deductions

Switching to an interest-only loan does not change the amount of interest you can deduct, but it does change your cash flow and borrowing structure.

An interest-only period on an investment loan keeps repayments lower in the early years, which can be useful if rental income does not yet cover all holding costs. The interest component remains fully deductible. Once the interest-only period ends, repayments increase as principal is added back in. Principal repayments are not deductible.

Under APRA's capital rules, a long-term interest-only loan with an LVR above 80 per cent and an interest-only period greater than five years is classified as non-standard, which may affect the lender's pricing or willingness to offer the product. Most lenders cap interest-only periods at five years for investment loans, after which the loan reverts to principal and interest unless refinanced.

Structuring Loans to Maximise Deductibility

Interest is only deductible if the borrowed funds are used for income-producing purposes. Mixing private and investment expenses in the same loan can compromise your deductions.

If you use equity from your home to fund a deposit on an investment property, the interest on that drawdown is deductible because the funds are being used to acquire an income-producing asset. If you use the same equity to pay for a family holiday, that portion is not deductible even though both drawdowns are secured against your home. Keeping loans separate by purpose makes it much clearer what you can claim.

Investors looking to expand their property portfolio should structure each acquisition with a dedicated loan facility rather than blending multiple purposes into a single split loan. Where refinancing is involved, maintain clear separation between deductible and non-deductible debt.

What Happens When You Refinance an Investment Loan

Refinancing does not reset the acquisition date for negative gearing or capital gains purposes. The property's tax treatment is locked in when you first bought it.

If you refinance an investment loan to access a lower rate or release equity for another purchase, the interest on the refinanced amount remains deductible provided the underlying use of funds was income-producing. Refinancing to access equity for private purposes creates a non-deductible debt portion, even if secured against the investment property.

Lenders assess refinance applications under current serviceability rules, including the 3 percentage point buffer and the debt-to-income cap of 6 times income for no more than 20 per cent of new investor loans. If your borrowing capacity has tightened since the original purchase, refinancing may require a lower LVR or additional security.

Record Keeping and Apportionment for Mixed-Use Properties

If a property is used partly for private purposes and partly for rental income, deductions must be apportioned.

An investor who rents out their property for 10 months of the year and occupies it personally for 2 months can only claim deductions for the rental period. Interest, rates, insurance and other expenses must be split on a time basis. The same applies if part of a property is rented and part is used by the owner.

Keep records of rental agreements, property management statements, loan statements, rates notices, insurance policies, repair invoices and depreciation schedules. The ATO requires you to substantiate every deduction claimed. Where rental income is received in advance or arrears, include it in the financial year it relates to, not when it hits your account.

Call one of our team or book an appointment at a time that works for you. We work with Melbourne investors to structure loans that preserve deductions, align with your tax position, and fit the way you build wealth through property.

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