Investment Loans and Tax: What Not to Claim

The Tax Benefit That Used to Work for Every Investor

For decades, Australian property investors could offset rental losses against their salary or wage income. That changed when new legislation passed on 26 June. From 1 July next year, if you buy an established dwelling, any rental loss stays quarantined inside your property portfolio. You can still claim every dollar you lose, but only against future rental profit or capital gains from residential property, not against your day job income.

The change applies to properties bought from 7:30pm on 12 May. If you already own a rental or signed a contract before that time, the old rules still apply to that property. If you're buying a newly built dwelling that adds to housing supply, the old rules also still apply.

What You Can Still Claim on Any Investment Loan

Interest on the loan you use to buy or hold a rental property remains fully deductible, provided the property is rented or held to produce income. The amount you can claim matches the amount you pay. If you're on interest-only repayments, you claim the interest. If you're paying principal and interest, you claim the interest portion only.

Loan establishment fees, ongoing account-keeping fees, and discharge fees are all claimable. So are valuation fees if the lender requires a valuation as part of the loan application or a refinance. If you borrow additional funds to renovate or improve the property, interest on that portion is also deductible.

One thing to watch: if you refinance and pull out equity for a private purpose, the interest on that drawn portion is not claimable. Lenders don't separate the loan automatically, so you'll need to keep records that show how much was used for the investment and how much wasn't.

The New Build Exception and What Counts

A newly built dwelling bought after 12 May can still be negatively geared under the old rules, meaning you can offset the loss against salary or other income. The definition is narrow. The property must be constructed on previously vacant land, or it must replace an existing dwelling and increase the total number of dwellings on the site.

Knock-down rebuilds that result in the same number of dwellings don't qualify. Neither do substantial renovations. If a builder completes a new dwelling and someone lives in it for more than 12 months before selling it to you, it's no longer treated as a new build for this purpose.

Consider an investor who buys a new townhouse in Baldivis, part of a development on land that was previously vacant. The purchase settles in October and the property rents for $550 per week. Interest on the loan is $680 per week. The $130 weekly shortfall, plus rates, insurance, and property management fees, produces a $9,000 loss for the financial year. That loss can be offset against the investor's wage income when they lodge their return, reducing tax payable by around $3,400 at a marginal rate of 37 per cent.

If the same investor bought an established townhouse in the same suburb for the same price, the $9,000 loss would be quarantined. It could be carried forward and used to reduce tax on future rental income or on the capital gain when the property is eventually sold, but it could not reduce this year's tax bill.

Expenses Beyond the Loan

Property management fees, council rates, water charges, strata levies, building insurance, and landlord insurance are all claimable in the year you pay them. Repairs that restore the property to its previous condition, such as fixing a broken hot water system or replacing damaged carpet, are also fully deductible in the year incurred.

Improvements are treated differently. If you renovate the kitchen or add a second bathroom, those costs form part of the property's cost base for capital gains tax purposes. You don't claim them as an annual deduction. Depreciating assets, such as ovens, air conditioners, and blinds, are claimed over time using the effective life set by the Tax Office.

For properties bought after 9 May 2017, you can't claim depreciation on second-hand plant and equipment items that were already installed when you bought the property. You can still claim depreciation on the building structure itself if a quantity surveyor's report shows there's value remaining.

Interest-Only Loans and How Deductions Change

Many investors choose interest-only repayments for the first few years because it keeps the loan balance steady and maximises the tax deduction. If you're paying $35,000 in interest each year and the property is fully rented, you claim $35,000.

When the loan switches to principal and interest, your total repayment increases but your deduction shrinks. You might now be paying $45,000 per year, but only $32,000 of that is interest. The other $13,000 reduces your loan balance but doesn't reduce your taxable income. The property's cash flow tightens, but your equity position improves.

There's no rule that says you have to take interest-only, and some lenders price it higher than principal and interest. The decision depends on your cash flow, your tax position, and whether you're planning to pay down other debt or build offset balances elsewhere. If you'd like to compare investment loan options that include both repayment structures, a broker can run the numbers with you.

Capital Gains Tax and the Discount That's Changing

When you sell a rental property you've held for more than 12 months, you currently receive a 50 per cent discount on the capital gain before tax is applied. From 1 July next year, that discount is being replaced with cost base indexation and a minimum 30 per cent tax rate on the real gain, but only for gains that accrue after that date.

Gains that built up before 1 July next year remain under the current rules. If you bought a property three years ago and sell it in five years' time, the gain for the first portion of ownership is calculated under the old discount method, and only the gain that accrues after 1 July next year uses the new method.

Eligible new builds retain access to the 50 per cent discount, or you can elect to use indexation and the 30 per cent minimum rate, whichever produces the lower tax. The main residence exemption is unchanged.

Quarantined Losses and What Happens When You Sell

If you buy an established property after 12 May and the rental loss is quarantined each year, those losses don't disappear. They accumulate in a separate bucket and can be used to offset rental profit in future years, or to reduce the capital gain when you eventually sell.

In a scenario like this: you hold the property for eight years, building up $60,000 in quarantined losses. When you sell, the capital gain is $150,000. You can use the quarantined losses to reduce the assessable gain to $90,000 before applying the discount or indexation method, depending on which rules apply to that portion of the gain.

The benefit is deferred, not lost. But if you were relying on an immediate tax refund each year to help with cash flow, that part of the equation has changed for new purchases of established dwellings.

Borrowing Capacity and How Lenders Assess Rental Income

Lenders use rental income to support your borrowing capacity, but they don't assume the property will be tenanted every week of the year. Most lenders apply a vacancy factor, typically 5 per cent, and then use 80 per cent of the remaining income in their serviceability calculation. Some lenders are more generous and use up to 100 per cent, depending on your overall financial position and the strength of the rental market in that area.

If the property rents for $26,000 per year, the lender might assess it as $26,000 less 5 per cent vacancy, leaving $24,700, then apply 80 per cent to give $19,760 in usable income. If your loan interest is $30,000 per year, the shortfall is $10,240, and the lender factors that into your overall servicing position alongside your salary and other commitments.

The new debt-to-income cap, introduced in February, also affects how much you can borrow. Lenders are limited in the proportion of investor loans they can write above six times your annual income. If you'd like to understand how your income and existing debts affect what you can borrow, our team can walk through a few scenarios and show you where the limits sit for your situation.

What Happens If You Refinance After the Rule Change

Refinancing an existing investment loan doesn't change the tax treatment of the property. If you bought before 7:30pm on 12 May, you can continue to offset rental losses against other income even if you refinance after 1 July next year. The grandfathering applies to the property and the date it was acquired, not to the loan product.

If you're holding an older loan with a higher rate or limited features, refinancing can reduce your interest cost without affecting your deductions. You'll still claim the full interest amount, it will just be a smaller number. The offset account, redraw facility, and repayment structure are all things you can improve through a refinance, and none of them alter the tax position of the property itself.

Call one of our team or book an appointment at a time that works for you. We'll look at your current loans, walk through what's claimable under the new rules, and help you structure things in a way that makes sense for your portfolio and your tax position.

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