Avoid These Tax Mistakes with Investment Loans

The Deduction That Nearly Cost a Cardiff Investor $12,000

The interest you pay on an investment loan is only deductible if the borrowing is genuinely used to buy or hold property that produces rental income. Interest on borrowings used to acquire or hold residential rental property is deductible against assessable income to the extent the property is rented or held to produce assessable income. If you borrow against an investment property but use those funds for personal purposes, that portion is not claimable, regardless of what the loan security is.

Consider an investor who bought a unit in Cardiff near the lake precinct, refinanced it to release equity, then used half the funds for a car and the other half as a deposit on a second rental property. She claimed the full interest bill against her rental income. During a review, the ATO disallowed half the claim because only half the borrowing related to producing assessable income. The adjustment wiped out two years of refunds and left her with a bill for the shortfall plus interest charges.

How Negative Gearing Works for Properties You Already Own

Losses from residential investment properties held at 7:30pm AEST on 12 May 2026, including properties under contract awaiting settlement at that time, continue to be fully deductible against other income, including salary and wages, until the property is sold. This means if you bought your rental property before that date, you can still offset any shortfall between rental income and holding costs against your wage or salary, reducing your taxable income each year.

This treatment also applies to new builds purchased after that date. For established properties purchased after 12 May 2026, the rules have changed. From the 2027-28 income year, losses related to established residential investment properties acquired after 7:30pm AEST on 12 May 2026 are deductible only against other income from residential properties, including capital gains on residential properties. If you're planning to add another property to your portfolio in Cardiff or surrounding areas like Boolaroo or Glendale, timing and property type now matter more than they used to.

What Counts as a Claimable Expense Beyond Interest

Borrowing costs are usually the largest claimable item, but plenty of other holding costs add up across a financial year. Other ongoing holding costs, such as council rates, insurance, property management fees, repairs and depreciation, are deductible under existing ATO rules for the period the property is rented or genuinely available for rent. That last part is critical. If your property sits vacant and you're not actively advertising it for rent, you can't claim the holding costs for that period.

Property management fees, landlord insurance, strata levies for units, water rates and maintenance costs such as fixing a leaking tap or repainting between tenants all fall into this category. Capital improvements like adding a deck or renovating a bathroom are treated differently. You can't claim them as an immediate deduction, but they add to your cost base and reduce capital gains tax when you eventually sell. Depreciation on the building and fixtures is another major deduction, particularly for newer properties, and requires a quantity surveyor's report to get right.

The Capital Gains Tax Rule That Changed in July 2027

For properties you've owned since before 1 July 2027, any gain that built up before that date is still eligible for the 50 per cent discount if you've held the property for more than 12 months. From 1 July 2027, the 50 per cent CGT discount for individuals, trusts and partnerships on affected assets is replaced by cost base indexation using CPI and a 30 per cent minimum tax rate on real capital gains accruing from that date. Gains that build up after 1 July 2027 are calculated differently. You index your cost base for inflation, then pay tax on the real gain above inflation at a minimum rate of 30 per cent.

For assets owned before 1 July 2027 and sold after that date, gains are taxed under the current rules for the portion accruing before 1 July 2027 and under the new rules for the portion accruing after that date. The ATO provides an apportionment method, or you can get a formal valuation as at 1 July 2027 to lock in the split. If you're holding a property in Cardiff for the long term, this becomes relevant when you eventually sell, particularly if values continue to rise across the Lake Macquarie area.

Why Loan Structure Matters When You Claim Deductions

If you set up your investment loan with an offset account, the cash sitting in that account does not reduce the loan balance for tax purposes. You're still paying interest on the full loan amount, which means you can still claim deductions on the full amount, provided the borrowing meets the purpose test. That makes offset accounts particularly useful for investors who want to reduce interest costs while preserving the full deduction.

Splitting your loan into multiple splits, one for the investment property and another for any personal borrowing, keeps the deductibility clear from the start. If you later want to access equity in your investment property for personal use, setting up a separate loan split at that point avoids the mess of trying to apportion interest between deductible and non-deductible purposes years down the track. We regularly see this become a problem during refinancing when investors have mixed purposes on a single loan facility and can't untangle them without reconstructing the whole transaction history.

What Happens if Your Property Sits Empty for Months

You can still claim deductions during a vacancy, but only if the property is genuinely available for rent. That means it needs to be advertised, in rentable condition, and you need to be responding to enquiries. If you take it off the market to renovate or leave it empty because you're thinking about selling, you can't claim holding costs for that period. The ATO looks at rental advertising, property management records and the length of the vacancy when they review claims.

For most properties around Cardiff, vacancy periods are short because rental demand across Lake Macquarie has stayed solid. But if you've inherited a property, moved out of one you used to live in, or bought something that needs work before it's tenanted, you need to get it on the market quickly if you want to keep claiming deductions. We've seen clients lose thousands in disallowed claims simply because they didn't think to list the property while they were deciding what to do with it.

Should You Fix or Keep Your Investment Loan Variable

Rate type affects your cash flow, but it doesn't change what you can claim. Interest is deductible whether it's charged on a variable or fixed rate, and whether you're paying principal and interest or interest only. The difference comes down to how much you're paying and what your borrowing capacity looks like when you want to add another property.

Interest-only loans reduce your monthly repayments, which can help with cash flow if your rental income doesn't quite cover all your costs. The downside is you're not paying down any debt, so your loan balance stays the same and you're not building equity through repayments. For investors planning to grow a portfolio, keeping repayments lower on existing properties can free up serviceability to borrow again. For those holding a single property long term, switching to principal and interest after a few years means you're building equity and reducing risk as you get closer to retirement.

Lenders Mortgage Insurance and What You Can Claim

If your deposit is less than 20 per cent, most lenders will require you to pay for lenders mortgage insurance. Under APS 112, an ADI may reduce its credit risk capital requirement where the exposure is covered by eligible LMI. To be eligible, the insurance must provide cover for all losses up to at least 40 per cent of the higher of the original loan amount and the outstanding loan amount. The premium is calculated based on your loan amount and how much you're borrowing as a percentage of the property's value.

The ATO treats LMI as a borrowing cost. If the premium is less than $100, you can claim it in the year you pay it. If it's more than $100, which it nearly always is on an investment loan, you need to spread the deduction over five years or the term of the loan, whichever is shorter. It's not a huge annual deduction, but it's one that gets missed often because it's a one-off cost at settlement and investors forget to include it in their return for the next five years.

New Level Lending works with property investors across Cardiff who want their loan structure set up correctly from the start so their tax position is clear and defensible. Call one of our team or book an appointment at a time that works for you.

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