Understanding the Basics of Investment Loan Tax Deductions

Investment properties in Rushcutters Bay offer strong unit yields close to 4.76 per cent, but the real value often comes from what you can claim at tax time.

For self-employed borrowers and professionals in the Eastern Suburbs, understanding which costs are deductible and how recent legislative changes affect your position matters as much as the loan structure itself. The rules around negative gearing have changed significantly for properties acquired after May, and the capital gains tax treatment shifts from July next year. Both affect how you structure your borrowing and what you can claim.

What You Can Deduct on an Investment Loan Right Now

Interest on borrowings used to acquire or hold a rental property is deductible against your assessable income, provided the property is rented or genuinely available for rent. Council rates, insurance, property management fees, repairs and depreciation on fixtures are also deductible during the period the property is tenanted or advertised.

Consider a working professional who bought a two-bedroom unit in Rushcutters Bay for $1,211,000 in early 2025 with a 20 per cent deposit. The loan amount sits at $968,800. At current variable rates, interest might run close to $60,000 annually. That entire amount is deductible, along with roughly $3,500 in strata fees, $1,800 in council rates, $1,200 in landlord insurance and $3,600 in property management fees. Rental income from the unit at $650 per week brings in $33,800 annually, which means the property runs at a loss of around $36,300 before depreciation. Under the current rules for properties held before mid-May, that loss offsets salary income dollar for dollar.

How Negative Gearing Works for Properties You Already Own

Losses from residential investment properties held at 7:30pm AEST on 12 May 2026, including properties under contract awaiting settlement at that time, continue to be fully deductible against other income until you sell. This treatment is preserved under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received royal assent on 26 June. If you bought before that date, nothing changes. Your losses continue to reduce your taxable income in full, regardless of whether you hold salary income, self-employment income or both.

The New Rule for Properties Acquired After May

From the 2027-28 income year, losses related to established residential properties acquired after 7:30pm AEST on 12 May 2026 are deductible only against other income from residential properties, including capital gains on residential properties. Excess losses can be carried forward to offset residential property income in future years, but they no longer reduce your salary or business income.

If you acquired a unit in Rushcutters Bay or Bondi Junction after mid-May, you can still claim all the same holding costs and loan interest, but those deductions now sit in a separate bucket. They reduce rental income from that property or other residential properties you own, and any unused losses carry forward indefinitely. The change does not apply to new builds, which retain full negative gearing regardless of purchase date.

For self-employed borrowers with multiple income streams, this creates a bifurcated tax position. Established properties acquired after May generate losses that quarantine within the residential property category, while new builds and pre-May properties continue to offset all income. Structuring your property investment strategy now requires closer attention to acquisition dates and dwelling status.

Capital Gains Tax from July Next Year

The 50 per cent capital gains tax discount continues to apply to gains accruing on all residential property up until 1 July 2027. From that date, the discount is replaced by cost base indexation using the Consumer Price Index and a 30 per cent minimum tax rate on real capital gains accruing after 1 July 2027.

For a property owned before 1 July 2027 and sold after that date, gains are taxed under the current rules for the portion accruing before 1 July 2027 and under the new indexed rules for the portion accruing after. You can obtain a market valuation as at 1 July 2027 or apply an ATO-published apportionment formula. Investors in eligible new build properties can choose between the existing 50 per cent discount and the new indexation and 30 per cent minimum tax arrangements at the time of sale.

The indexed approach may deliver a lower taxable gain in high-inflation environments, but it introduces complexity at the point of disposal. If you hold a Rushcutters Bay unit purchased in early 2025 for $1,211,000 and sell it in 2030, you will need to split the gain into a pre-July 2027 portion taxed under the 50 per cent discount and a post-July 2027 portion taxed under indexation with the 30 per cent floor.

What Counts as a New Build for Tax Purposes

Eligible new builds include dwellings constructed on previously vacant land and dwellings replacing existing properties where the number of dwellings increases. Knock-down rebuilds that do not increase dwelling numbers, and substantial renovations, are not eligible. A new build occupied for more than 12 months before sale to a subsequent investor loses access to negative gearing for that subsequent purchaser.

In practice, almost all unit stock in Rushcutters Bay, Double Bay and Bondi Junction is established. New builds in this corridor are rare and typically confined to boutique developments or large-scale harbour-fronting projects. If you are acquiring an established unit after mid-May, assume the new negative gearing quarantine applies unless you can verify the dwelling meets the new build criteria.

Interest-Only Loans and Deductibility

Switching to an interest-only loan does not change what you can deduct, but it does change the deduction amount and your cash flow. Principal repayments are not deductible. Interest repayments are. For investors focused on maximising current-year deductions, interest-only structures keep the deductible portion higher in the early years of the loan.

An interest-only loan on $968,800 at current rates might cost $60,000 annually, all of which is deductible. The same loan on principal and interest might cost $72,000 annually, but only $60,000 of that is interest. The remaining $12,000 is principal repayment, which reduces your loan balance but offers no tax benefit. Interest-only structures also improve short-term cash flow, which matters for self-employed borrowers managing variable income.

Borrowing Costs, Lenders Mortgage Insurance and Stamp Duty

Loan establishment fees, valuation fees and legal costs incurred in acquiring the loan are deductible over five years or the term of the loan, whichever is shorter. Lenders Mortgage Insurance premiums paid on investment loans are also deductible over the same period. Stamp duty on the property purchase is not immediately deductible but forms part of the cost base for capital gains tax purposes, reducing your taxable gain when you sell.

For a $1,211,000 unit purchase in Rushcutters Bay with a 10 per cent deposit, Lenders Mortgage Insurance might add $25,000 to $30,000 to the upfront cost. That premium is deductible at roughly $5,000 to $6,000 per year over five years. Stamp duty in New South Wales on a $1,211,000 purchase runs close to $51,000 for an investor, none of which is deductible as an ongoing expense, but all of which reduces your capital gain at the time of sale.

Debt Recycling and Deductibility

For owner-occupiers in Double Bay or Darling Point looking to convert non-deductible home loan debt into deductible investment debt, debt recycling allows you to progressively replace your owner-occupied loan with investment borrowings as you pay down the original loan. The strategy works by using equity in your home to fund investments, then using the returns from those investments to accelerate the repayment of your non-deductible debt.

The key requirement is that the borrowed funds are used to acquire income-producing assets. Interest on those borrowings becomes deductible, while interest on the remaining owner-occupied portion does not. The ATO looks at the purpose of each borrowing, not the security provided. Mixing purposes within a single loan account creates apportionment headaches, so separate loan splits are the cleaner approach.

Refinancing and Ongoing Loan Structures

If you refinance an investment loan to access a lower rate or release equity, the deductibility of interest depends on what the funds are used for. Interest on the portion of the loan used to acquire or hold the investment property remains deductible. Interest on any additional borrowings used for private purposes, such as renovating your own home or purchasing a car, is not deductible regardless of the security.

Investment loan refinancing is common among Eastern Suburbs investors seeking to improve cash flow or access equity for a second purchase. The refinance itself does not change your deduction position, but drawing additional equity and using it for non-investment purposes creates a split-purpose loan that requires careful tracking. Most lenders and brokers recommend separate loan accounts for investment and private purposes to avoid ongoing apportionment.

Call one of our team or book an appointment at a time that works for you. We work with self-employed borrowers and professionals across Rushcutters Bay, Double Bay and the Eastern Suburbs, and we can walk you through the structures and claims that apply to your specific situation.

Frequently Asked Questions