Why should property investors claim tax deductions?

Investment property financing involves more than securing the right loan amount.

The way you structure borrowings and claim expenses directly affects your after-tax return, particularly as new federal legislation reshapes the landscape for properties acquired after May this year.

Interest deductibility remains the foundation

Interest on any loan used to acquire or hold a rental property is deductible against the rental income and, under current rules, against your other assessable income including salary. The deduction applies whether your loan is on a variable rate, fixed rate, or split between the two, and whether you're paying principal and interest or interest only.

Consider a Doncaster investor who purchases a unit near The Pines Shopping Centre with an 80 per cent loan to value ratio. The investor selects an interest only structure for the first five years to preserve cash flow while maximising the interest claim. Each dollar of interest paid reduces taxable income, which at marginal rates above 30 per cent can deliver a meaningful annual rebate that offsets holding costs during the early years of ownership.

The distinction between deductible and non-deductible interest depends on loan purpose, not the security offered. Borrowing against an investment property to fund a new car or home renovation will not attract a deduction, even though the security is a rental dwelling. Conversely, using equity in your owner-occupied home to fund the deposit on an investment property allows you to claim interest on that component of the debt.

Claimable expenses extend beyond interest

Beyond interest, property investors can claim council rates, water charges, strata or body corporate fees, landlord insurance, property management fees, maintenance and repairs, and depreciation on both the building and fixtures. Advertising for tenants, pest control, and garden care during tenancy periods are also deductible. Stamp duty and loan establishment costs are generally not immediately deductible but may be claimed over five years or added to the cost base for capital gains purposes.

Rental income must be declared in the year it is received or entitled to be received, and expenses must be incurred in deriving that income. Vacancy periods reduce your ability to claim some ongoing costs, though loan interest remains deductible provided the property is genuinely available for rent.

Negative gearing rules change from July 2027

From 1 July 2027, investors who acquire residential property on or after 7:30pm AEST on 12 May 2026 will have net rental losses quarantined. Those losses can only be offset against current or future residential rental income or future residential property capital gains, not against salary or other income. The quarantine does not apply to properties held before that date and time, or to newly constructed dwellings that meet the eligible new build criteria.

For investors who secured a Doncaster property in late May or June this year, the transitional period allows full negative gearing until 30 June 2027. After that date, any ongoing losses are quarantined. Investors who purchased before 12 May retain access to unrestricted negative gearing until they sell, even if they hold the property for decades.

The definition of an eligible new build is narrow. It covers dwellings built on previously vacant land and dwellings that replace existing stock where the total number of dwellings increases, such as a dual occupancy replacing a single home. A knock-down rebuild that replaces one dwelling with one new dwelling does not qualify. If a new build is occupied for more than 12 months before being sold to an investor, that subsequent purchaser loses access to negative gearing.

Capital gains treatment shifts for new acquisitions

From the same July 2027 date, the 50 per cent discount on capital gains for individuals and trusts is replaced with cost base indexation and a minimum 30 per cent tax rate on real gains, applying only to the portion of the gain that accrues after 1 July 2027. Gains accrued before that date continue under the current discount method.

Investors acquiring eligible new builds can elect between the 50 per cent discount and the indexed cost base with the minimum rate, offering some flexibility depending on holding period and inflation forecasts. This election does not extend to established dwellings acquired after 12 May 2026 unless they fall within a carve-out such as widely held unit trusts or qualifying affordable housing programs.

For a Doncaster investor holding an established townhouse acquired in 2024, gains up to 30 June 2027 will be discounted by 50 per cent, and only gains accruing from 1 July 2027 onward will be subject to the new indexation and minimum tax rules. The transition is designed to avoid retrospective taxation but adds complexity to record-keeping and disposal planning.

Structuring the loan to preserve deductibility

Maintaining clear separation between investment and private debt is critical. Redrawing funds from an investment loan to pay for personal expenses converts a portion of that loan to private use, eroding the deduction. Using an offset account linked to the investment loan for parking surplus cash, rather than paying down the loan and redrawing later, preserves the full interest claim.

Investors expanding their property portfolio often refinance to release equity and fund the next acquisition. Provided the released funds are used to purchase or improve a rental property, the interest on the additional borrowing remains deductible. Documenting the purpose at the time of drawdown is essential if the ATO queries the claim in a future compliance review.

Serviceability under the DTI cap affects borrowing capacity

From February this year, lenders are limited in the proportion of new investor loans they can write at a debt-to-income ratio of six times or greater. This cap applies separately to investor lending and does not affect loans for newly erected dwellings or the construction of new homes, both of which are exempt.

For Doncaster buyers in the established market around Doncaster Road or near Westfield, the DTI restriction may reduce available loan amounts, particularly for buyers with existing investment debt. Rental income is included in serviceability calculations, but lenders typically apply a haircut to account for vacancy rates and management costs, often shading declared rent by 20 per cent. Maximising your assessable rental income through appropriate lease terms and minimising non-deductible debt improves your position within the DTI framework.

Timing and documentation underpin your claims

Keeping contemporaneous records of loan purpose, expenses incurred, and rental income received is not optional. The ATO has increased scrutiny of rental property deductions, particularly around interest apportionment, private use, and capital versus revenue classification of repair costs.

Claiming depreciation requires a quantity surveyor's report for properties built after 1985, and the ability to claim plant and equipment depreciation on second-hand assets was removed for properties acquired after May 2017, though building depreciation continues. Engaging a qualified tax adviser ensures your claims align with both legislative requirements and ATO guidance, particularly where new provisions apply from July 2027.

If you're weighing up buying your first investment property or considering a refinance to restructure existing debt, understanding how the tax treatment flows through to your net position will inform both your loan choice and your holding strategy. Call one of our team or book an appointment at a time that works for you.

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