Beginner's Guide to Investment Loan Tax Benefits

What Tax Benefits Apply to Investment Loans

Interest on an investment loan is deductible when the property is rented or genuinely available for rent. You claim the interest against your assessable income, which reduces the tax you pay each year. This applies to loans secured against the rental property itself or other security, provided the borrowed funds were used to buy or maintain the investment.

The deduction is proportional. If you borrow $500,000 and use $450,000 to buy the rental property and $50,000 to renovate your own home, only 90 per cent of the interest qualifies. Lenders do not automatically split the loan for you, so keeping clear records from the start matters.

How Negative Gearing Works Under the New Rules

Negative gearing lets you offset a rental loss against other income like your salary. From 1 July 2027, that changes for most established properties bought after 12 May 2026. Losses on those properties will be quarantined. You can still claim all the same deductions, but the loss can only offset other residential rental income or be carried forward to reduce tax on a future sale.

Properties purchased before that date, or under contract before 7:30pm on 12 May 2026, are grandfathered. You continue under the existing rules until you sell. New builds on previously vacant land, or developments that increase dwelling numbers, remain fully deductible under the old negative gearing treatment even after 1 July 2027.

Consider an investor who bought an older unit near Marine Drive in April 2026 and settles in August. That property retains full negative gearing indefinitely. Another investor who buys a similar unit in September 2026 will lose negative gearing from 1 July 2027. Both can claim the same expenses, but only the first investor can use the loss to reduce tax on their wage.

Eligible New Build Properties and Why They Still Qualify

The legislation defines an eligible new build as a dwelling constructed on land that was vacant immediately before construction, or a development where the number of dwellings increases. A townhouse subdivision that replaces a single house qualifies. A knock-down rebuild that replaces one house with one house does not.

If you are considering property investment in Safety Beach or nearby, understanding this distinction is important. The peninsula has limited vacant land, and most opportunities involve established homes near the foreshore or older units close to Dromana Road. Those purchases will be subject to quarantined losses from mid-2027. New apartment or townhouse developments closer to Frankston or Somerville may qualify as eligible new builds, preserving access to full negative gearing.

Once a new build has been occupied for more than 12 months and is then sold to another investor, that subsequent buyer loses access to the concessional treatment. The property is treated as established from that point.

What Expenses You Can Claim on Your Investment Property

All ordinary expenses incurred in earning rental income remain deductible, regardless of the negative gearing changes. Loan interest is the largest, but you can also claim council rates, water charges, insurance, property management fees, body corporate levies, repairs and maintenance, pest control, gardening, and advertising for tenants.

Depreciation on the building and fixtures is another major deduction, though rules introduced several years ago prevent investors from claiming plant and equipment depreciation on second-hand assets in established properties. Quantity surveyor reports are still worthwhile for new builds and for claiming capital works deductions on older properties.

Loan establishment fees, valuation costs, and ongoing loan account-keeping fees are also deductible, either in full in the year incurred or spread over five years. If you refinance your investment loan to secure a lower rate, the discharge costs and new application fees are deductible in the same way.

How the Capital Gains Tax Changes Affect Long-Term Returns

From 1 July 2027, the 50 per cent discount on capital gains is replaced with cost base indexation and a minimum 30 per cent tax rate on the real gain. This applies only to gains that accrue after 1 July 2027. Gains accrued before that date, even on properties bought after 12 May 2026, continue under the current rules.

In practical terms, you will calculate two gains when you sell: one for the period up to 30 June 2027 under the old discount rules, and one for the period after under indexation and the minimum rate. Eligible new build properties offer an election between the discount and indexation, which provides flexibility depending on your circumstances at the time of sale.

The minimum 30 per cent rate does not apply if you are receiving a means-tested income support payment in the year of sale. The main residence exemption is unchanged.

Borrowing Capacity and Serviceability for Investors

Lenders assess investment loan applications using the net rental income, which is gross rent less an allowance for vacancy, management fees, and other holding costs. Most lenders apply a vacancy rate of 4 to 5 per cent and may also reduce the rental income by a further buffer. If the property is negatively geared, the shortfall is added to your other commitments when calculating borrowing capacity.

The APRA serviceability buffer remains at 3 percentage points above the loan rate. From February 2026, a debt-to-income cap also applies. Lenders can fund no more than 20 per cent of new investor loans at a DTI above 6 times gross income. This cap is calculated separately from owner-occupied lending, so your income and total debt, including investment loans, are assessed independently.

In our experience, Safety Beach investors with stable employment and modest personal debts have little difficulty meeting the DTI threshold. Investors with multiple properties or high non-deductible debt sometimes need to refinance or restructure before adding another property.

Structuring Your Loan to Preserve Deductibility

Interest deductibility depends on what the borrowed funds are used for, not what security is provided. If you redraw from an investment loan to pay for a holiday or personal expenses, that portion of the interest is no longer deductible. If you refinance and increase the loan to fund renovations on your own home, the additional interest is private.

Keep the investment loan separate. Do not link an offset account that holds personal savings. Do not redraw for non-investment purposes. If you need to access equity for another purpose, speak with a broker about structuring a separate split or facility so the investment loan remains untouched. This preserves the full deduction and simplifies your records.

Some investors use equity in their home to fund the deposit on a rental property. The interest on that borrowing is deductible because the purpose was investment. The loan is secured against the home, but the deduction follows the use of funds, not the security.

What Changed and What Stayed the Same

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026. The negative gearing quarantine and capital gains tax changes take effect from 1 July 2027. Properties held before the announcement on 12 May 2026 are protected. New builds retain full deductions regardless of purchase date.

All other investment loan settings remain in place. Interest is still deductible. Expenses are still claimable. Depreciation still applies. Lenders Mortgage Insurance paid on an investment loan is still deductible over five years or in the year incurred. Stamp duty is still a cost base addition for capital gains, not an immediate deduction.

The legislation includes carve-outs for widely held trusts and some affordable housing arrangements. Further regulations are still being released by the ATO, so investors acquiring property between now and mid-2027 should seek advice from a licensed specialist to confirm how the transitional rules apply to their settlement date.

Call one of our team or book an appointment at a time that works for you. Bayland Finance works with property investors across Safety Beach, Dromana, and the Mornington Peninsula. We will structure your investment loan to suit your circumstances and connect you with the right accountant or adviser when tax questions sit outside our scope.

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