Investment Loans & Tax: Everything You Need to Know

Investment property deductions can significantly reduce your taxable income, but recent budget changes mean the way you claim those deductions depends on when you bought and what type of property you chose.

The traditional approach to property investment relied on offsetting rental losses against your wage income while building equity over time. That framework still exists for properties purchased before 13 May 2026, but different rules now apply to established properties bought after that date. Understanding which rules apply to you, and how to structure your borrowing accordingly, affects both your cashflow and your long-term wealth position.

How Negative Gearing Deductions Work Under the New Rules

Negative gearing allows you to deduct rental property losses against other income, but only if your property was purchased before 13 May 2026. For established residential properties bought after that date, losses can only be offset against rental income or capital gains from other residential properties from 1 July 2027 onwards. Unused losses carry forward to future years.

Consider a buyer who purchases an established unit in Engadine's older apartment stock near the train station in late May 2026. If rental income falls $8,000 short of their loan repayments and holding costs each year, they can no longer claim that $8,000 against their salary from July 2027. Instead, the loss accumulates and can be used when they sell the property or earn positive rental income from another investment. The immediate cashflow benefit disappears, but the deduction itself remains accessible later.

This distinction matters when comparing investment loan options across established stock versus new builds. New residential construction remains fully eligible for negative gearing under the existing rules regardless of purchase date, which makes the upfront cashflow position more predictable for buyers using that deduction to manage serviceability.

What You Can Still Claim on Any Investment Property

Interest on your investment loan, property management fees, council and water rates, insurance, repairs, and maintenance remain fully deductible regardless of when you bought or what type of property you own. Depreciation on the building structure and any plant and equipment installed by you also continues to reduce taxable income, though depreciation rules for second-hand assets were tightened in previous years.

For a property purchased in one of Engadine's newer townhouse developments south of Woronora River, loan interest might represent $24,000 annually on a $600,000 loan at current variable rates, while other holding costs add another $6,000 to $8,000. If rental income covers $28,000, the property runs close to neutral before depreciation. Adding $5,000 in depreciation on the building and fixtures could push the property into a modest loss, but that loss is still claimable because the building qualifies as new construction.

Strata levies for properties in a body corporate are also deductible, as are the costs of advertising for tenants, landlord insurance, and any loan establishment or ongoing fees tied to your investment property finance. The deduction applies in the year the expense is incurred, so timing large repairs or pre-paying certain expenses can be managed in consultation with your accountant.

Capital Gains Tax Changes and What They Mean for Your Sale

The 50% capital gains discount is being replaced with inflation-based indexation and a minimum 30% tax on gains from 1 July 2027, but only on gains that accrue after that date. Gains made before 1 July 2027 remain subject to the existing 50% discount. New builds offer a choice between the old discount and the new indexation method, giving buyers flexibility depending on inflation and holding period.

If you purchased a property in Engadine before mid-2026 and hold it for another decade, the gain up to 30 June 2027 is taxed under the existing rules, while only the portion of growth after that date uses the new calculation. For most investors holding property long-term in suburbs with steady capital growth like Engadine, the indexation method may deliver a lower taxable gain than the flat discount, but it depends on inflation rates and your marginal tax rate at sale.

Investors buying new builds retain the option to use whichever method produces the lower tax outcome. This makes newly constructed properties more attractive from a capital gains perspective, particularly if inflation remains elevated and the indexed cost base grows significantly over a long hold period.

Interest-Only Versus Principal and Interest for Tax Efficiency

Interest-only loans maximise your immediate tax deduction because the entire repayment goes toward deductible interest rather than non-deductible principal. Lenders typically offer interest-only periods of up to five years on investment loans, which can then be extended or converted to principal and interest depending on your circumstances and the lender's criteria.

An interest-only loan of $500,000 at a variable investor rate might cost around $2,900 per month in repayments, all of which is deductible. The same loan on principal and interest would cost closer to $3,400 per month, but only the interest portion is claimable. The $500 difference in monthly cashflow can determine whether a property is serviceable under a lender's assessment, particularly if negative gearing restrictions apply and you cannot offset the loss against wage income.

The downside is that your loan balance does not reduce during the interest-only period, so you build equity only through capital growth and any voluntary extra repayments. When the interest-only term ends, repayments increase substantially as you begin paying down principal. Many investors refinance their investment loan at that point to secure a new interest-only term with another lender, though this depends on the property's value, your equity position, and your ongoing serviceability.

How Loan Structure Affects Claimable Interest

Only interest on funds borrowed for investment purposes is deductible. If you refinance and withdraw equity for personal use, the interest on that portion is not claimable. Keeping your investment debt separate from any personal borrowing is essential, which is why most investors use a standalone loan for each investment property rather than a single facility covering multiple purposes.

If you own a home in Engadine and want to use equity to fund a deposit on an investment property elsewhere, the structure matters. The interest on the amount borrowed against your home is only deductible if those funds are used to purchase the investment. If you later redraw funds from that loan for a personal expense like a car or renovation, you lose the deduction on that portion. Lenders and accountants both recommend using offset accounts for personal savings rather than redraw facilities, because offset balances do not interfere with the deductible portion of your loan.

Stamp Duty, Depreciation, and Other Upfront Costs

Stamp duty on an investment property is not immediately deductible, but it forms part of your cost base for capital gains tax purposes, reducing your taxable gain when you eventually sell. The same applies to conveyancing fees, building and pest inspection costs, and loan establishment fees that are capitalised into the loan rather than paid upfront.

Depreciation on the building and fixtures is claimed annually through a depreciation schedule prepared by a quantity surveyor. The cost of that report, typically between $600 and $1,200, is itself deductible in the year it is incurred. Depreciation can add several thousand dollars to your claimable deductions each year, particularly on newer properties where both the building structure and items like air conditioning, blinds, and appliances have substantial remaining effective life.

For properties purchased in Engadine's older stock near the shops on Caldare Street, building depreciation may have fully expired, but you can still claim depreciation on any capital improvements you make, such as a new kitchen or bathroom, as well as items like hot water systems or ceiling fans that you install during your ownership.

What Happens If Your Investment Runs at a Loss Long-Term

Carrying forward losses under the new negative gearing rules means those deductions are not lost, but they also do not provide immediate tax relief. If you are holding a property that consistently runs at a loss and you cannot offset that loss against wage income, the cashflow impact can make the investment difficult to sustain without other income or equity growth.

This is where borrowing capacity becomes relevant. Lenders assess your ability to service an investment loan based on the rental income, the loan repayments, and your other commitments. If negative gearing is not available to improve your after-tax cashflow, the lender's serviceability calculation may limit how much you can borrow or whether you can take on additional investment debt in future.

Some investors respond by targeting properties with stronger rental yields or by choosing new builds where negative gearing still applies in full. Others adjust their loan structure to interest-only repayments to reduce the monthly cost, or they wait until wage income increases or other debts are cleared before expanding their portfolio.

Speaking With a Broker Before You Commit

Tax rules, loan structures, and lender policies all interact to determine whether an investment property works for your situation. A conversation before you sign a contract gives you time to model the cashflow, confirm your borrowing capacity, and structure the loan in a way that aligns with your intentions.

We work with property investors across Engadine and the broader Sutherland Shire to structure loans that reflect both the tax treatment of the property and the investor's broader financial position. Whether you are purchasing your first investment or refinancing an existing portfolio, understanding how the deductions apply to your specific circumstances means you can make decisions with confidence rather than assumptions.

Call one of our team or book an appointment at a time that works for you.

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