Most property investors know the basic deductions. What changes the outcome is knowing which expenses deliver the largest return and how your loan structure affects what you can claim.
The 2026-27 Federal Budget changed the rules around negative gearing and capital gains tax for properties purchased after 12 May 2026. If you bought an established residential property from 13 May 2026 onwards, both the 50% CGT discount and full negative gearing deductions will no longer apply from 1 July 2027. New builds remain incentivised under both measures. If you bought before Budget night, your existing arrangements are largely grandfathered.
Interest Deductions and How Loan Structure Affects Them
Interest on an investment loan is tax deductible when the borrowed funds are used to purchase or improve an income-producing property. The deduction applies whether you hold the property on a variable rate or fixed rate, and whether you're making principal and interest or interest only repayments.
Interest only structures deliver larger annual deductions during the interest only period because the entire repayment is deductible. Consider a property investor who borrows $600,000 on an interest only basis. At a variable interest rate of 6.2%, the annual interest is around $37,200, all of which is claimable. If that same loan were structured as principal and interest, the deductible portion shrinks each year as the principal is repaid. For professionals holding multiple properties or planning to build a portfolio, interest only loans preserve deductibility and keep repayments lower during the growth phase.
If you're using equity from your owner-occupied home to fund the deposit on an investment property, make sure that drawdown is kept in a separate loan split. Mixing investment and personal borrowing reduces the deductible portion and creates complications during tax time.
What You Can Claim Immediately and What You Cannot
Ongoing expenses such as property management fees, council rates, water charges, landlord insurance, strata or body corporate fees, repairs, and maintenance are fully deductible in the year they're incurred. These are the expenses that offset rental income and contribute to negative gearing.
Upfront costs such as stamp duty, loan establishment fees, and conveyancing are not immediately deductible. Stamp duty and conveyancing are added to the property's cost base and reduce capital gains tax when you sell. Loan establishment fees and lender fees must be claimed over five years or the life of the loan, whichever is shorter.
Depreciation on the building and fixtures is another deduction available to investors, but only for properties where construction was completed after 1987. A quantity surveyor report breaks down the claimable amounts. Investors in older properties can still claim depreciation on removable fixtures such as ovens, carpets, and blinds.
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Negative Gearing Under the New Rules
Negative gearing allows you to offset a net rental loss against your other income, such as salary. From 1 July 2027, losses from established residential properties acquired after 12 May 2026 will only be deductible against rental income or capital gains from residential property, not against other income like wages. Excess losses can be carried forward to offset residential property income in future years, so deductions are not lost entirely.
Changes to negative gearing only apply to residential property. Commercial property and other asset classes such as shares keep the existing arrangements. Investors in new builds are excluded from the changes and retain full negative gearing deductions.
For professionals who bought an established investment property before 13 May 2026, the existing rules apply. If you're considering an additional purchase, the choice between a new build and an established property now carries a tax consequence that affects cashflow over the life of the loan.
Capital Gains Tax and the Indexation Change
The government will replace the current 50% CGT discount with a discount based on inflation and introduce a minimum 30% tax on capital gains, taking effect from 1 July 2027. The CGT reforms will only apply to gains arising after 1 July 2027, so existing property investors are not affected on gains already accrued.
Cost base indexation will apply to CGT assets held for more than 12 months, meaning investors will only pay tax on their real inflation-adjusted gain. Investors in new builds will be able to choose between the 50% CGT discount or the new arrangements, effectively giving them a choice of whichever is more favourable. The main residence CGT exemption is unchanged, and the CGT discount for superannuation funds is not expected to change.
If you hold an established residential property purchased after 12 May 2026, the combination of limited negative gearing and the new CGT treatment shifts the focus toward capital growth and rental yield rather than tax-driven cashflow relief.
Loan to Value Ratio and Lenders Mortgage Insurance
The size of your investor deposit affects both the interest rate you're offered and whether you'll pay Lenders Mortgage Insurance. Most lenders will lend up to 90% of the property value for investment purposes, but borrowing above 80% triggers LMI. That premium is capitalised into the loan amount and the interest paid on it becomes tax deductible, but the LMI premium itself is not claimable as an immediate expense. It must be claimed over five years or the life of the loan.
Investors with equity in an existing property can avoid LMI by using a portion of that equity as a deposit. This requires a refinance or equity release on the existing property, structured so the new borrowing remains deductible. Mixing funds or failing to document the use of equity can create issues with the ATO.
Rental Income and Claimable Expenses
All rental income must be declared, including rent paid by tenants, bond money you retain to cover damage, and rental income received in advance. If the property sits vacant, and provided the property is available for rent, you can still claim expenses such as interest, rates, and insurance during the vacancy period, but you cannot claim a deduction for lost rent.
Expenses such as advertising for tenants, property management fees, and repairs carried out between tenants are fully deductible. Renovation or improvement costs that add value to the property are not immediately deductible. These must be claimed through depreciation or added to the cost base for CGT purposes.
Consider a professional who holds two properties and earns $180,000 in salary. One property generates a $15,000 loss after all claimable expenses. If that property was purchased before 13 May 2026, the loss reduces taxable income to $165,000. If purchased after that date and held past 1 July 2027, the loss can only offset income from the other investment property or be carried forward.
Portfolio Growth and Loan Structuring
Professionals building a property portfolio need to consider how each loan is structured and how that structure affects deductibility as the portfolio grows. Splitting loans by property, separating investment and owner-occupied debt, and using offset accounts correctly all affect tax outcomes.
Offset accounts linked to investment loans reduce the interest charged, which also reduces the deductible amount. For that reason, most investors direct surplus cash into offset accounts linked to non-deductible debt, such as their home loan, and leave investment loans untouched. This maximises both the tax deduction on the investment property and the interest saved on the home.
Understanding how borrowing capacity is assessed across multiple properties also matters. Lenders assess rental income at 80% of the actual rent to account for vacancy rates and maintenance costs. That means a property generating $30,000 in annual rent is only assessed as contributing $24,000 toward serviceability. The interest on the investment loan is treated as an ongoing commitment, which reduces the amount you can borrow for future purchases.
Call one of our team or book an appointment at a time that works for you. We'll review your current loan structure, identify deductions you may be missing, and structure your next investment loan to align with the changes introduced in the 2026 Budget.
