Beginner's Guide to Investment Loan Tax Deductions

What You Can Actually Claim on an Investment Property Loan

Interest charged on your investment property loan is tax deductible, provided the loan was used to purchase or improve an income-producing property. This includes interest on the initial purchase loan, refinancing, and borrowings used for renovations that add value or improve rental appeal.

Many Balgowlah investors hold properties in the suburb or surrounding Northern Beaches areas where rental yields typically sit between 3% and 4%. When your loan interest exceeds rental income, you're carrying what's known as negative gearing. Until recently, that shortfall could be claimed against your salary or other income. But for established properties purchased after 12 May 2026, the rules change from 1 July 2027.

Consider an investor who purchased an established apartment in Balgowlah in late May 2026. They borrowed $850,000 at a variable rate to fund the purchase. Annual interest sits around $50,000, while rental income brings in $38,000. That $12,000 shortfall could previously offset their wage income. From 1 July 2027, that loss can only be claimed against other residential property income or carried forward to offset future rental income or capital gains. The interest itself remains deductible, but where you can claim the loss has changed.

Loan establishment fees, lender application fees, and valuation costs are also claimable. If the total is under $5,000, you can claim the full amount in the year incurred. Above that threshold, the deduction is spread over five years or the loan term, whichever is shorter.

Claimable Expenses Beyond the Loan

You can claim ongoing property costs including council rates, strata levies, landlord insurance, property management fees, repairs, and maintenance. Depreciation on the building and fixtures adds another layer, particularly for newer properties or those with recent renovations.

Balgowlah has a mix of older walk-up blocks and more recent developments near Stockland Balgowlah. Older units built before 1987 offer limited building depreciation, but you can still claim plant and equipment such as carpets, blinds, and appliances. Newer apartments offer stronger depreciation schedules, which can meaningfully reduce taxable income in the early years of ownership.

Advertising for tenants, lease preparation costs, and even travel to inspect the property or meet with tradespeople can be claimed where directly related to earning rental income. Keep records of kilometres travelled and the purpose of each trip.

How the 2026 Budget Changes Affect Your Strategy

From 1 July 2027, two changes reshape how investment loans are structured and what they deliver after tax. The first affects negative gearing. The second changes capital gains tax.

For properties purchased after Budget night in May 2026, losses from negatively geared established properties can only offset residential property income, not wages. Those losses aren't lost entirely. They carry forward and reduce taxable income when the property turns cash flow positive or when you sell and realise a capital gain.

The capital gains tax discount is also changing. Instead of the existing 50% discount, gains will be indexed for inflation and subject to a minimum 30% tax rate. Investors in new builds can choose between the old 50% discount and the new indexed method, whichever is more favourable. The indexation approach means you only pay tax on the real gain after accounting for inflation, which can benefit long-term holders in lower-growth markets.

If you purchased your Balgowlah investment before 13 May 2026, your existing arrangements remain. The 50% CGT discount still applies to gains accrued up to 1 July 2027, and negative gearing works as it always has. This grandfathering protects existing investors but creates a distinct difference in tax treatment depending on when you bought.

Interest Only or Principal and Interest for Tax Purposes

Interest only repayments are common on investment loans because they maximise your deductible interest while keeping repayments lower during the interest only period. From a tax perspective, the interest you pay is deductible regardless of whether you're also paying down principal.

The choice between interest only and principal and interest should consider cash flow, your broader investment strategy, and whether you're carrying non-deductible debt elsewhere. Paying down your home loan while keeping the investment loan interest only can be more tax efficient, provided your lender allows ongoing interest only terms and you're comfortable with the balloon payment or refinance at the end of the interest only period.

Most lenders offer interest only terms of up to five years on investment property finance, with the option to extend or revert to principal and interest. Repayments step up noticeably when principal repayments begin, so model the cash flow impact before committing to a loan structure.

Structuring Loans to Protect Deductibility

Once a loan is established, its purpose is locked in. If you take out a loan to buy an investment property, the interest remains deductible as long as the property produces income. But if you redraw funds from that loan to pay for a holiday or home renovation, the portion of interest attributable to the redraw is no longer deductible.

This is where offset accounts and separate loan splits become relevant. An offset account linked to your investment loan reduces the interest you pay without affecting the loan balance or deductibility. You retain access to your savings, reduce interest costs, and keep the loan structure intact.

If you're planning to use equity from a Balgowlah property to fund another purchase, consider splitting the loan so the new borrowing sits in a separate account with its own purpose. A refinance can also reset your loan structure if previous redraws or mixed-purpose borrowings have muddied the tax treatment.

Depreciation and How It Adds Up

Depreciation isn't a cash expense, but it reduces your taxable income. A quantity surveyor prepares a depreciation schedule that outlines the claimable amount each year for both the building and the fixtures inside it.

Building depreciation applies to properties built after 1987 and is claimed at 2.5% per year over 40 years. Plant and equipment depreciation covers items like ovens, air conditioners, and flooring, with each item depreciating at different rates depending on its effective life.

Recent budget changes removed plant and equipment depreciation for second-hand assets in established properties, but building depreciation and depreciation on new assets you install remain claimable. If you're comparing an older Balgowlah unit near the village with a newer apartment closer to the Burnt Bridge Creek walking trails, the depreciation difference can be several thousand dollars per year.

What Happens When You Sell

Capital gains tax applies to the profit you make when selling an investment property. The gain is calculated as the sale price minus the purchase price, minus buying and selling costs like stamp duty, legal fees, and agent commissions, minus capital improvements.

For properties held longer than 12 months and purchased before the new rules take effect, you receive a 50% discount on the taxable gain. Under the new indexed model applying from 1 July 2027, your cost base is adjusted for inflation, so you're only taxed on the real gain. A minimum 30% tax then applies to that gain.

Carried forward losses from negative gearing can offset the capital gain in the year of sale, reducing the tax payable. This is one reason the loss carryforward rule under the new system still holds value, even though the immediate wage offset is removed.

Borrowing Capacity and Loan Structure

Lenders assess investment loan applications differently to owner-occupied loans. Rental income is typically shaded by 20% to account for vacancies and management costs, and the loan is stress tested at a higher rate than the actual interest rate you'll pay.

If you're holding multiple properties or planning to build a portfolio, loan structure affects how much you can borrow for the next purchase. Interest only loans reduce your repayment amount, which can improve serviceability. Offset accounts and redraws offer different flexibility, and some lenders price them differently.

Balgowlah's proximity to Manly, the harbour beaches, and schools like Balgowlah Heights Public School supports steady rental demand. But vacancy rates, body corporate fees in strata buildings, and maintenance costs all factor into whether the property services itself or requires ongoing contribution. Your loan structure should allow for periods where the property sits vacant or requires unexpected repairs.

Call one of our team or book an appointment at a time that works for you to discuss how your loan structure supports your investment goals and maximises what you can claim each year.

Frequently Asked Questions