Simple Hacks to Maximise Tax Deductions on Investment Loans

What You Can Actually Claim on an Investment Property Loan

Most rental expenses tied to your investment property loan are tax deductible, including loan interest, establishment fees, ongoing account fees, and the cost of applying for or refinancing your loan. If you pay interest on a loan used to buy, build, or improve a rental property, you can claim that interest as a deduction against your rental income each financial year.

In our experience, many property investors miss smaller deductions like loan discharge fees when selling, valuation fees during refinance, or even the interest portion of a redraw if the funds were used for property-related costs. Those add up over time, and they're just as claimable as your monthly loan repayments.

Consider a property investor who refinances their loan to access equity for a second property. The application fee, valuation cost, and ongoing account-keeping fees on both loans are all deductible. If they also paid Lenders Mortgage Insurance on the second loan because their loan to value ratio sat above 80%, that LMI premium can be claimed either in full in the year it's paid or spread over five years. That single refinance could unlock several thousand dollars in deductions that year, reducing taxable income and improving cash flow.

How Negative Gearing Still Works After the 2026 Budget

Negative gearing allows you to offset rental property losses against other income, but recent changes mean the rules now depend on when and what you bought. If you purchased an established residential property before 12 May 2026, you can still claim rental losses against your salary or other income as before. If you bought after that date, losses from 1 July 2027 onward can only be offset against rental income or capital gains from residential property, not your wage.

For properties purchased after Budget night, excess losses aren't lost entirely. They carry forward and can be used to reduce tax on future rental income or capital gains when you eventually sell. If you're buying a new build, negative gearing rules remain unchanged regardless of when you buy, so new construction still carries a tax advantage under the revised framework.

This doesn't mean established properties purchased after May 2026 are suddenly unviable. It does mean your cash flow in the early years may look different, and the benefit of negative gearing shifts from immediate income tax relief to a deferred offset when you sell or when rental income exceeds expenses. It's worth running the numbers with your accountant before committing, especially if you were relying on tax refunds to cover holding costs.

Interest-Only Loans and How They Affect Your Tax Position

An interest-only loan lets you pay only the interest portion each month for a set period, usually one to five years, which keeps repayments lower and maximises your tax deduction since none of your payment goes toward non-deductible principal. Every dollar you pay in interest on an investment loan is fully deductible, so interest-only structures are common among investors focused on cash flow and tax efficiency.

The downside is that you're not reducing the loan balance during the interest-only period, so your debt remains the same and you'll face higher repayments once the loan reverts to principal and interest. That reversion can be a shock if you haven't planned for it, particularly if rental income hasn't increased or if rates have moved higher in the meantime.

As an example, an investor with a $500,000 loan at a variable rate paying interest-only might have monthly repayments around $2,500. Once the loan switches to principal and interest, that figure could jump to $3,200 or more depending on the rate and remaining term. If rental income doesn't cover the difference, the property moves from negatively geared to more negatively geared, which increases your tax deduction but also increases the cash you need to find each month. Planning the transition well in advance keeps the strategy sustainable.

Splitting Your Loan Between Fixed and Variable Rates

Some investors split their loan into fixed and variable portions to balance certainty with flexibility. The fixed portion locks in a rate for a set term, which can help with budgeting and protects you if rates rise. The variable portion gives you access to offset accounts and the ability to make extra repayments without penalty, which can reduce your taxable income if you're paying down debt faster.

From a tax perspective, both portions generate deductible interest, but the variable split offers more control. You can link an offset account to the variable portion and park rental income or other funds there to reduce the interest you're charged without technically making a repayment. Because offset funds remain accessible, you retain liquidity while still lowering your interest bill and your deduction, which can be useful if your income fluctuates or you want to keep cash on hand for maintenance or future purchases.

Keep in mind that a split loan often involves two sets of fees, two interest calculations, and potentially two different loan accounts. It's a sensible structure if you want some rate protection and some flexibility, but it's not worth the administrative overhead unless the loan amount and your investment strategy justify it. For most investors with loans above $400,000, the trade-off makes sense.

Depreciation and Capital Works Deductions You Shouldn't Ignore

While not directly part of your investment loan, depreciation on the building and fittings inside your rental property works alongside your loan interest to reduce taxable income. Capital works deductions apply to the structure itself and are claimed at 2.5% per year for properties built after 1987. Plant and equipment depreciation covers things like ovens, air conditioners, and carpets, and the rate depends on the item's effective life.

A quantity surveyor's report costs between $500 and $800 and sets out exactly what you can claim each year. That upfront cost is also tax deductible, and the report typically uncovers deductions worth several thousand dollars annually, especially on newer properties. Even if you bought an established property, there's usually something to claim unless the building is very old or has been fully depreciated by previous owners.

If you've owned your investment property for a few years and never obtained a depreciation schedule, you can still get one now and amend previous tax returns to claim what you missed. You have up to two years to amend a return, so there's often a window to recover deductions you didn't know existed. Combined with your loan interest and other claimable expenses, depreciation can turn a marginally negatively geared property into a much more tax-effective holding.

What Happens to Your Deductions When You Refinance

Refinancing an investment loan doesn't stop you from claiming interest, but it does create a few new deductible costs. Application fees, valuation fees, discharge fees from your old lender, and settlement costs on the new loan are all claimable in the year you incur them or spread over five years if you prefer. If you refinance to access equity for another investment, the interest on that additional borrowing is also deductible as long as the funds are used for income-producing purposes.

If you refinance and pull out equity to renovate your own home or buy a car, that portion of the loan is no longer deductible because it's not being used to generate rental income. The Australian Taxation Office is quite clear on this, the deduction is tied to the purpose of the borrowing, not the security. Mixing investment and private purposes in the one loan can create messy tax reporting, so it's worth keeping a clear paper trail or splitting the loan into separate accounts if you're using equity for multiple purposes.

Some investors refinance every few years to access better rates or features, and each time they do, they pick up another round of deductible costs. Done strategically, refinancing not only improves cash flow through lower repayments but also generates a tax deduction from the fees involved. Just make sure the rate improvement or feature upgrade justifies the cost and effort, because refinancing for the sake of it rarely makes financial sense.

Capital Gains Tax Changes and What They Mean for Your Investment

From 1 July 2027, capital gains on established residential properties purchased after 12 May 2026 will no longer qualify for the 50% discount. Instead, gains will be indexed for inflation, and a minimum 30% tax will apply to the gain. If you bought before Budget night, your existing arrangements remain, so any gain you've already made up to 1 July 2027 will still receive the 50% discount when you sell.

For new builds purchased after Budget night, you'll be able to choose between the old 50% discount or the new indexed method, whichever gives you the lower tax outcome. This makes new construction more attractive from a tax perspective, especially if you're holding the property long-term and expect inflation to erode a significant portion of your nominal gain.

The change doesn't affect the main residence exemption, so your family home remains exempt from capital gains tax. It also doesn't change the deductibility of your loan interest or other holding costs. What it does change is the after-tax return when you eventually sell, which means the decision to buy established versus new, and the timing of any future sale, now carries more tax weight than it did before. Speaking to a tax adviser before purchasing can help you understand which structure works in your favour.

Loan Features That Can Improve Your Tax Efficiency

An offset account attached to your variable rate investment loan reduces the interest you're charged without reducing the loan balance. Because your deduction is based on interest paid, not interest charged, an offset lowers your deduction slightly but improves your cash flow. If you're holding surplus cash or rental income between expenses, parking it in an offset rather than a savings account means you're not paying tax on the interest earned, because offset accounts don't earn interest, they reduce it.

Redraw facilities let you access extra repayments you've made, but they come with a catch. If you redraw funds for a non-investment purpose, the interest on that redrawn amount is no longer deductible. If you redraw to cover a rental property repair or to fund a deposit on another investment, the interest remains deductible. Keeping records of what you redraw and why is important, because the ATO will ask if they ever review your return.

Some lenders also offer loan features like free additional repayments, portability, or the ability to split your loan without fees. These don't directly affect your tax position, but they give you more control over how you manage debt and cash flow, which indirectly supports a long-term investment strategy. When comparing investment loan options, focus on the features that align with how you plan to use the property and manage repayments, not just the advertised rate.

Using Equity to Fund Your Next Investment and Keep Deductions Flowing

Once your property increases in value, you can access that equity to fund a deposit on another investment without selling. The interest on the amount you borrow against your equity is deductible as long as the funds are used to purchase or improve an income-producing asset. This is one of the most tax-efficient ways to grow a property portfolio, because you're using existing assets to fund new ones while maintaining full deductibility on both loans.

If you borrow $100,000 against the equity in your first property to fund a deposit and costs on a second property, the interest on that $100,000 is deductible against your rental income from both properties. You're now claiming interest on two loans, depreciation on two properties, and all the associated holding costs across both. The compounding tax benefit accelerates as your portfolio grows, assuming rental income and capital growth support the additional debt.

The risk is that you're increasing your overall debt without increasing your income proportionally, especially in the early years when both properties may be negatively geared. If rates rise or rental income falls, servicing two loans can become difficult. Running a proper borrowing capacity assessment before committing to a second purchase helps you understand whether your income and existing commitments can sustain the additional loan, both now and if conditions tighten.

Call one of our team or book an appointment at a time that works for you. We'll walk through your current loans, your investment goals, and how to structure your borrowing to keep as much rental income as possible in your pocket each year.

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