What You Can Actually Claim on an Investment Loan
Interest on borrowings used to acquire or hold a rental property is deductible against your assessable income as long as the property is rented or genuinely available for rent. That includes the full amount you pay each month on your investment loan, whether the loan is interest-only or principal-and-interest, and regardless of whether the property is tenanted for the entire year. Other ongoing holding costs are also deductible, including council rates, landlord insurance, property management fees, body corporate levies if you own a unit, and repairs that maintain the property in its current condition. Depreciation on fixtures and fittings also reduces taxable income, though you will need a quantity surveyor's report to claim it accurately.
Consider a New Lambton investor who refinances an existing owner-occupied loan to release equity for a deposit on a rental property in Adamstown. The interest on the new investment loan is fully deductible because the funds were used for an income-producing purpose. The interest on the remaining owner-occupied debt is not deductible because it relates to the investor's private residence. Where a loan is used for both purposes, only the investment portion is claimable. The ATO requires you to track how borrowed funds are used, not what security is provided. Mixing borrowed funds complicates record-keeping, so keeping investment and private debt separate from the outset saves time at tax time.
Negative Gearing Before the Rule Change
Negative gearing allows property investors to deduct losses from rental properties against other income, including salary and wages. If your rental expenses and loan interest exceed your rental income, the loss reduces your taxable income for the year, which can lead to a tax refund or a lower tax bill. This treatment remains unchanged for properties held at 7:30pm AEST on 12 May 2026, including properties under contract awaiting settlement at that time. Investors who already own rental property in New Lambton or elsewhere can continue to offset losses against all income until the property is sold, regardless of when that sale occurs.
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New builds acquired after 12 May 2026 are also exempt from the rule change. An eligible new build includes a dwelling constructed on previously vacant land or a property where demolition and rebuilding increases the number of dwellings on the site. A knock-down rebuild that replaces one home with another single dwelling does not qualify. Once a new build has been occupied for more than 12 months, a subsequent purchaser loses access to the negative gearing exemption. The exemption follows the property only while it remains genuinely new to the market as a rental investment.
How the 2027-28 Rule Change Affects New Investors
From the 2027-28 income year, losses on established residential investment properties acquired after 7:30pm AEST on 12 May 2026 can only be offset against income from other residential properties, including capital gains on residential property sales. If your rental property runs at a loss and you have no other residential property income that year, the loss is quarantined and carried forward to offset future residential property income. You cannot use it to reduce your wage or business income. The change applies to individuals, partnerships, companies and most trusts, but widely held unit trusts such as managed funds are carved out.
Properties acquired between 7:30pm AEST on 12 May 2026 and 30 June 2027 may still be negatively geared under the current rules for that first financial year only. From 1 July 2027 onward, the new quarantine applies. Interest on the investment loan remains fully deductible, but the timing and scope of when you can use that deduction has changed. Investors with multiple properties may still benefit if one property generates a capital gain while another is negatively geared, because the loss can offset the gain within the residential property category.
Capital Gains Tax Changes from 1 July 2027
From 1 July 2027, the 50 per cent capital gains discount for individuals, trusts and partnerships is replaced by cost base indexation and a 30 per cent minimum tax rate on real gains accruing from that date. Under cost base indexation, you adjust the original purchase price of the property upward in line with inflation, then pay tax only on the gain above that indexed amount. For a property owned before 1 July 2027 and sold afterward, gains are split into a pre-1 July 2027 portion taxed under the old discount rules and a post-1 July 2027 portion taxed under the new indexed rules. You can either obtain a market valuation as at 1 July 2027 or apply an ATO apportionment formula.
Investors in eligible new builds have a choice at the time of sale: apply either the existing 50 per cent discount or the new indexation and minimum rate to the post-1 July 2027 portion of the gain. This offers flexibility depending on the rate of inflation and your marginal tax rate at the time of sale. The 30 per cent minimum rate applies only to the indexed portion of the gain and only if your effective tax rate on that portion falls below 30 per cent. Recipients of the Age Pension, Disability Support Pension, parental leave pay or JobSeeker are exempt from the minimum rate in any year they receive those payments.
Interest-Only Versus Principal-and-Interest for Investors
An interest-only period on an investment loan keeps monthly repayments lower because you are not reducing the loan balance. All of the interest remains deductible for as long as the property is rented or available for rent. Lower repayments can improve cash flow in the early years, particularly if rental income does not cover all holding costs. Principal-and-interest repayments reduce the loan balance over time, which can lower the total interest paid across the life of the loan and build equity faster.
From a tax perspective, the choice between interest-only and principal-and-interest does not change what you can claim. Only the interest component of any repayment is deductible. The principal portion is a reduction of debt, not an expense. Many investors start with an interest-only period to maximise cash flow and tax deductions, then switch to principal-and-interest repayments as rental income rises or when the interest-only period expires. Lenders typically allow interest-only terms for up to five years on investment loans, after which the loan reverts to principal-and-interest unless you apply for an extension.
Loan Structure and Deductibility
How you structure your borrowing affects what you can claim and how much flexibility you retain for future purchases. A standalone investment loan secured by the rental property itself is the cleanest structure. All interest is deductible because the entire loan relates to an income-producing asset. If you use equity from your New Lambton home to fund a deposit on a rental property elsewhere, the new loan or split secured against your home is still fully deductible as long as the borrowed funds are used only for the investment purchase.
Problems arise when borrowed funds are used for a mix of purposes. If you redraw from an investment loan to pay for a family holiday or home renovation, the portion of interest relating to that private use is no longer deductible. The ATO requires you to apportion interest based on how the funds were used, not on what property secures the loan. An offset account linked to an investment loan does not reduce the loan balance for tax purposes. The offset reduces interest charged, which in turn reduces your deduction. Many investors prefer to direct surplus cash toward owner-occupied debt, which is not deductible, while keeping investment loan balances and deductions as high as possible. Discussing your intended structure with a mortgage broker before applying helps avoid costly mistakes that are difficult to unwind later.
Refinancing to Access Equity for Additional Investments
Refinancing an existing investment property to release equity for a deposit on a second property is a common wealth-building strategy for New Lambton investors. The new borrowing is deductible as long as the funds are used to acquire or hold an income-producing asset. The original loan remains deductible as before. This approach allows you to grow a portfolio without needing to save another deposit from after-tax income, though it does increase your overall debt and the risk that comes with higher borrowing.
Lenders assess your borrowing capacity by looking at all income and all committed expenses, including existing investment loans and the new loan being applied for. They also apply a serviceability buffer of at least 3.0 percentage points above the loan product rate, meaning they assess whether you could still afford repayments if rates rose. Rental income from the new property is usually included at 80 per cent of the lease amount to account for vacancy and holding costs. If you already hold investment debt, lenders also consider your debt-to-income ratio. From 1 February 2026, banks can lend no more than 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. Refinancing to release equity for further investment requires careful planning to ensure serviceability and LVR limits align with your goals.
What Happens If Rental Income Falls Short
If your rental property sits vacant for part of the year, you can still claim interest and holding costs for the period the property is genuinely available for rent. The ATO expects you to make reasonable efforts to find a tenant, such as listing the property with an agent or advertising it at a realistic rent for the area. If you choose to leave the property vacant for personal reasons or price it above market to avoid tenants, deductions may be disallowed for that period. Where the property is under renovation or repair and cannot be rented, the ATO will usually allow deductions if the work is carried out without unreasonable delay.
If rental income and other residential property income are not enough to absorb the loss in a given year under the new quarantine rules, the unused loss is carried forward indefinitely. It remains available to offset future residential property income, including gains on the sale of the property or income from other rental properties you acquire later. This means losses are not lost, but their usefulness is delayed until you have the right type of income to offset them against. For investors who rely on negative gearing to manage cash flow in the early years, this delayed benefit can affect the timing of purchases and the type of property that makes sense financially.
Speak to Someone Who Understands the Changes
Tax rules affecting investment property have shifted significantly. What worked for investors a few years ago may not work the same way now, and what you plan to buy this year could be treated differently than something you buy next year. Whether you are adding to an existing portfolio or considering your first rental property in New Lambton, the structure of your loan and the timing of your purchase both matter. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
Can I still claim investment loan interest under the new negative gearing rules?
Yes, interest on investment loans remains fully deductible. From the 2027-28 income year, losses on established properties bought after 12 May 2026 can only be offset against other residential property income, but the interest itself is still claimable. Properties held at 12 May 2026 and new builds remain fully deductible against all income.
What counts as an eligible new build for negative gearing purposes?
An eligible new build includes a dwelling constructed on vacant land or a property where demolition and rebuilding increases the number of dwellings on the site. A knock-down rebuild that replaces one home with one home does not qualify. Once a new build has been occupied for more than 12 months, the next buyer loses the exemption.
How does cost base indexation work for investment property capital gains?
From 1 July 2027, you adjust your property's purchase price upward in line with inflation and pay tax only on gains above that indexed amount. A 30 per cent minimum tax rate applies to the real gain if your effective rate is lower. For properties owned before 1 July 2027, gains are split between the old discount rules and the new indexed rules.
Is interest-only or principal-and-interest better for tax purposes?
Only the interest portion of any repayment is deductible, so the choice does not change what you can claim. Interest-only repayments maximise your deduction and improve cash flow in the short term, while principal-and-interest reduces debt and builds equity over time.
What happens if I use investment loan funds for private purposes?
The portion of interest relating to private use is not deductible. The ATO requires you to apportion interest based on how borrowed funds were used, not what property secures the loan. Keeping investment and private debt separate from the start avoids record-keeping problems later.
