Simple hacks to claim every deduction on your investment loan

Interest on an investment loan is fully deductible when the borrowing is used to acquire or hold a rental property that produces assessable income.

Burwood investors typically borrow between 70 and 90 per cent of a property's value, depending on whether they hold the asset within their own name or through a structure. The interest component alone on a property at the suburb's current median can represent a substantial deduction each financial year, but the benefit only applies if the loan is structured correctly from the outset and the funds are used exclusively for income-producing purposes.

How loan purpose determines what you can claim

The Australian Taxation Office allows interest deductions based on how borrowed funds are used, not on the security offered. If you refinance an investment property and draw equity for private purposes such as a car or holiday, the portion of interest attributable to that private drawdown is not deductible. In contrast, if you use equity from your home to fund the deposit on a Burwood rental property, the interest on that portion is deductible because the funds are used to produce assessable income.

Consider a buyer who owns a home in Ashburton and refinances to release equity for a rental unit near Burwood Village. The loan is secured against the Ashburton property, but the entire drawdown is used to purchase and settle the investment. The interest on that drawdown remains fully deductible because the purpose is investment, not private consumption.

Interest-only versus principal and interest repayments

An interest-only period reduces monthly outgoings and maximises the deduction in the early years of ownership. The entire repayment is interest, so the entire repayment is deductible. Once the loan converts to principal and interest, only the interest portion remains claimable. The principal component builds equity but provides no tax benefit.

Interest-only terms are typically available for one to five years on investment loans, after which the loan reverts to principal and interest unless renegotiated. Some investors refinance at the end of each interest-only period to maintain the structure, particularly when cash flow from rent does not yet cover the full principal and interest payment.

Capitalised costs and loan establishment fees

Loan establishment fees, valuation costs, mortgage registration fees and Lenders Mortgage Insurance are all deductible, but the treatment differs. Fees under a certain threshold can be claimed in full in the year incurred. Larger amounts must be apportioned over five years or the life of the loan, whichever is shorter. If the loan is refinanced or repaid early, the unclaimed balance can be deducted in the year of discharge.

Lenders Mortgage Insurance is common when the deposit is below 20 per cent. On a property near Deakin University, an investor borrowing at 90 per cent loan to value ratio might incur several thousand dollars in LMI. That premium is deductible over five years. If the loan is refinanced after three years, the remaining two years of deductions can be claimed in that third year.

Negative gearing and how it changes from July 2027

Negative gearing allows rental losses to offset other income such as salary or business earnings. If your Burwood property generates rental income below the total of interest, rates, insurance and other holding costs, the loss reduces your taxable income in that financial year.

From 1 July 2027, properties acquired on or after 7:30pm AEST on 12 May 2026 will have rental losses quarantined. Those losses can only be offset against other residential rental income or carried forward to offset future rental income or capital gains on residential property. Losses cannot reduce salary or wage income. Properties held before that time retain access to traditional negative gearing until sold.

Eligible new residential dwellings are exempt from the quarantine. A newly constructed townhouse on a previously vacant block in Burwood remains fully negatively geared even if acquired after the May 2026 cut-off. A knock-down rebuild that does not increase the number of dwellings does not qualify.

Claimable expenses beyond loan interest

Body corporate fees are fully deductible for units and townhouses. Burwood has a substantial apartment stock, particularly around Burwood East and near the Burwood One precinct, and quarterly strata levies often exceed one thousand dollars. Council rates, landlord insurance, property management fees and water charges paid by the owner are all claimable in the year they are incurred.

Repairs that restore the property to its previous condition are deductible immediately. Replacing a damaged hot water system or repairing storm damage to a roof can be claimed in full in that financial year. Improvements that enhance the property, such as adding a deck or renovating a kitchen, must be depreciated over time through capital works deductions.

How capital gains tax applies when you sell

Gains accrued before 1 July 2027 continue under current rules, where individuals receive a 50 per cent discount on capital gains held longer than 12 months. Gains accruing after that date are subject to indexed cost base rules and a minimum 30 per cent tax rate on real gains, unless the property qualifies as an eligible new build. New builds purchased after May 2026 can elect between the 50 per cent discount and the indexed cost base treatment.

If you purchase a Burwood investment property now and sell it in future, only the portion of the gain accruing after 1 July 2027 is subject to the new rules. The gain up to that date is calculated under the current discount method. The property is effectively bifurcated at the transition date for capital gains purposes.

Splitting loans to preserve deductibility

Maintaining separate loan accounts for investment and private purposes protects the deduction. A single loan used for mixed purposes requires ongoing apportionment, and any private drawdown permanently taints that portion of the debt. Using a dedicated investment loan account for the property and a separate account or redraw facility for personal expenses simplifies record keeping and ensures the full interest charge remains deductible.

In our experience, investors who draw equity from an investment property for private use without splitting the loan often face disputes with the ATO during audit. The safest approach is to establish a new loan split at the time of drawdown, with one account quarantined for investment purposes and the other clearly identified as private.

Rental income and vacancy periods

Rental income is assessable in the financial year it is received or entitled to be received. If a tenant pays four weeks in advance, that income is assessable when received. Deductions remain available during vacancy periods, provided the property is genuinely available for rent. Advertising the property, engaging a property manager and maintaining the asset in a rentable condition all demonstrate intent to produce income.

Burwood's vacancy rate has historically remained low due to proximity to Deakin University and the Burwood Highway commercial precinct. Extended vacancies are uncommon, but if a property is left untenanted without genuine marketing effort, the ATO may disallow deductions for that period.

Documentation and record retention

Loan statements, rates notices, insurance invoices, body corporate statements and property management reports should be retained for five years after lodgement of the relevant return. Digital copies are acceptable. If you claim depreciation, the quantity surveyor's report and any subsequent capital improvement invoices form part of the cost base for capital gains purposes and should be retained until the property is sold and the disposal return is lodged.

When refinancing or restructuring, a clear paper trail linking the new borrowing to the investment property preserves the deduction. The ATO may request evidence that refinanced funds were used for income-producing purposes, particularly if the loan amount increases or the security changes.

The tax treatment of investment property is specific to individual circumstances and subject to change. A licensed tax adviser or accountant can review your structure, assess eligibility for deductions and ensure compliance with current law. Refinancing an existing investment loan to improve your rate or release equity requires careful structuring to maintain deductibility.

Call one of our team or book an appointment at a time that works for you to discuss structuring your investment loan to maximise deductions and align borrowing with your property strategy.

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