The Pros and Cons of Investment Loan Tax Deductions

Tax deductions are one of the main reasons investors buy property in Australia, but the rules changed significantly in the 2026 Budget.

If you bought an established rental property after 12 May 2026, the way you claim losses has shifted. If you bought before that date, your current arrangements still apply. Either way, knowing which expenses you can claim and how your loan structure affects those claims makes a measurable difference to your after-tax position.

What You Can Still Claim on an Investment Loan

Interest on your investment loan remains fully deductible, regardless of when you bought the property. This applies whether you're on a variable rate, fixed rate, or interest only arrangement. Loan establishment fees, mortgage broker fees, and ongoing account fees are also claimable, usually spread across the life of the loan or five years, whichever is shorter.

Consider an Echuca investor who bought a unit near the Campaspe River for rental purposes before Budget night. Their loan is interest only at a variable rate, costing around $1,800 per month. That full amount is deductible against their taxable income. They also paid a $600 establishment fee when they took out the loan, which they're claiming at $120 per year over five years.

Other deductible expenses include property management fees, council rates, water charges, landlord insurance, repairs and maintenance, and depreciation on fixtures and fittings. Body corporate fees are claimable if the property is in a strata scheme. Strata-titled properties are common in Echuca's newer developments near the Victorian Goldfields Railway precinct.

How Negative Gearing Works Now

Negative gearing means your property costs more to hold than it earns in rent, and you claim that loss against your other income. From 1 July 2027, if you bought an established residential property after 12 May 2026, you can only offset those losses against rental income or capital gains from residential property, not your salary or business income.

Losses you can't use this year carry forward to future years. You don't lose them. You just can't use them to reduce your wage income in the current tax year.

If you bought before Budget night, the old rules still apply. You can still claim your net rental loss against all income sources, including wages. That distinction matters if you're deciding whether to refinance an existing property or buy another one.

The Capital Gains Tax Changes from 2027

From 1 July 2027, the 50% capital gains discount is being replaced with an inflation-adjusted cost base. Instead of getting half your gain tax-free, you'll only pay tax on the real gain after accounting for inflation. There's also a minimum 30% tax on capital gains, though income support recipients are exempt.

These changes only apply to gains that arise after 1 July 2027. If you bought a property years ago and it's already increased in value, that existing gain is not affected. The new rules apply to growth from 1 July 2027 onwards.

If you buy a new build, you can choose between the 50% discount or the new inflation-adjusted method, whichever works out lower. That makes new construction more appealing from a tax perspective, particularly in areas like Echuca where new townhouses and units are appearing near the hospital and High Street.

Interest Only vs Principal and Interest for Tax Purposes

Interest only loans maximise your annual deductions because every dollar of your repayment is interest, and interest is fully deductible. Principal and interest loans reduce your deductible amount each year as more of your repayment goes toward the principal.

An investor with a $400,000 loan on interest only at 6.5% per year pays around $26,000 in interest annually. That full amount is deductible. The same loan on principal and interest over 30 years would have total repayments of around $30,400 per year, but only the interest portion is deductible. In year one, that's about $25,800, dropping each year as the balance reduces.

Interest only periods typically last one to five years, after which the loan reverts to principal and interest unless you request an extension. Extensions depend on your equity position and the lender's current policy. If you're planning to hold the property long term and want to build equity while still claiming deductions, principal and interest makes sense. If your priority is maximising cash flow and tax deductions in the short term, interest only is usually the better option. You can discuss investment loan options with a broker to see which structure suits your situation.

How Loan Structure Affects What You Can Claim

The tax office only allows deductions on money borrowed for investment purposes. If you redraw from your investment loan to pay for a holiday or a car, that portion of the interest is no longer deductible. Keeping your investment loan separate from your personal borrowing protects your deductions.

In a scenario where an Echuca investor uses equity in their rental property to buy a new car, they should set up a separate split or loan account for the car portion. The interest on the investment property loan remains deductible. The interest on the car loan does not.

If you're using equity from your home to fund a deposit on a rental property, make sure that drawdown is recorded as a separate loan or split with its own account. The interest on money used to buy an investment property is deductible, even if the loan is secured against your home. The interest on money used to buy your own home is not. Clear separation matters at tax time.

What Happens When You Refinance an Investment Loan

Refinancing an investment loan doesn't change your ability to claim deductions, as long as the purpose of the borrowing remains investment-related. If you refinance to a lower rate or switch from principal and interest to interest only, the interest on the new loan is still fully deductible.

Problems arise when you increase your loan amount during a refinance and use that extra money for non-investment purposes. If you refinance a $350,000 investment loan and take out $400,000, using the extra $50,000 for home renovations, only the interest on $350,000 remains deductible. The interest on the $50,000 is not.

If you're refinancing to access equity for another investment property, the full amount is deductible. Documentation matters. Keep loan statements, contracts, and settlement documents that show what the money was used for. The tax office will ask for evidence if they review your return.

Maximising Deductions Without Overcomplicating Your Finances

Claiming every legitimate deduction doesn't mean creating a complicated loan structure. It means understanding what you're entitled to claim and keeping your borrowing purposes separate.

Most investors in regional areas like Echuca hold one or two properties and want a structure that's clear and defensible. That usually means one loan per property, kept separate from personal borrowing, with a dedicated offset or redraw that's only used for investment-related expenses.

If you're planning to build a property portfolio, setting up your first loan properly makes it much easier to add a second or third property later. Lenders assess your borrowing capacity based on your existing debts, income, and rental returns. A well-structured first loan gives you more options when you're ready to expand.

The recent tax changes don't eliminate the benefits of property investment. They do change the timing and type of benefit you receive, particularly if you're buying established property from mid-2026 onwards. Speaking with a tax professional about your specific circumstances is worth the cost, especially if you're in a high tax bracket or planning to buy multiple properties over the next few years.

If you're considering an investment property in Echuca or want to review how your current loan is structured from a tax perspective, call one of our team or book an appointment at a time that works for you.

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