Tax Deductions and What Not to Claim on Investment Loans

What You Can Actually Claim When You Borrow to Invest

Loan interest is the big one. If you borrow to buy a residential property that earns rental income, the interest charged on that loan is deductible against the income you receive. That applies whether you're on a variable rate or locked in, and it covers interest only and principal and interest structures. The key is that the property needs to be rented or genuinely available for rent. If it's sitting empty because you're renovating or you've let a mate stay there for nothing, you can't claim the interest for that period.

Depreciation is the other major deduction that investors in Marrickville often overlook. Older properties around the area, particularly those brick walk-ups near Addison Road or the Federation cottages closer to Sydenham Road, still have claimable depreciation on things like ovens, blinds, carpets and hot water systems. You'll need a quantity surveyor's report to get the numbers right, but it's usually worth the outlay. The building itself can also be depreciated if it was built after 1987, though that's less common in the older pockets of the suburb.

Property management fees, council rates, strata levies if it's a unit, landlord insurance, water charges and repairs all go on the list too. Repairs are things that restore the property to its previous condition, like fixing a broken tap or repainting a wall. Improvements, like adding a deck or renovating a kitchen, get claimed differently through the capital works deduction over a longer period.

Consider an investor who picks up a two-bedroom unit near Marrickville Metro. They're paying around $2,800 a month in loan repayments on a $650,000 investment loan, with about $2,400 of that going to interest. Over the year, that's roughly $28,800 in claimable interest alone. Add in $3,200 for strata, $1,800 in council rates, $2,500 in management fees, $1,200 in landlord insurance and another $3,000 in depreciation from the quantity surveyor's report, and they're looking at around $40,500 in deductions. If the property rents for $750 a week, that's $39,000 in income. The loss gets deducted from their salary, which reduces the tax they pay. That's negative gearing in action, and it's still available on properties bought before the proposed changes kick in.

Interest Only Loans and How the Deduction Works

Interest only loans let you claim the full repayment amount because you're not paying down any principal. The entire monthly payment goes to interest, which means the entire payment is deductible. That's why they're still common with property investors, even though serviceability has tightened in recent years. The flip side is that your loan balance doesn't drop, so when the interest only period ends, your repayments jump because you're suddenly paying off principal as well.

Most lenders will offer interest only periods of up to five years on investment loans, though some will go longer if your loan to value ratio is low. Once that period ends, you'll switch to principal and interest unless you apply to extend. Not all lenders will approve an extension, especially if your circumstances have changed or if rental income isn't covering what they need to see.

The catch with interest only is that while you're maximising your tax deductions now, you're not building any equity through loan repayments. Your equity only grows if the property value increases. That works well in a rising market, but if values flatten or you need to sell during a dip, you're still carrying the full debt. It's a trade-off, and it depends on whether you're prioritising cash flow or debt reduction.

What Marrickville Investors Get Wrong About Claimable Expenses

Stamp duty isn't deductible. It's a capital cost, which means it gets added to your cost base and reduces your capital gains tax when you eventually sell. Same goes for conveyancing fees and building and pest inspections. None of those go on your annual tax return as a deduction.

Loan application fees and ongoing account fees are claimable, but only if they're directly related to the investment loan. If you paid a broker fee or a valuation fee as part of the loan setup, those can be claimed over five years or the life of the loan, whichever is shorter. Some investors try to claim the whole lot in year one, but the ATO doesn't allow that unless the total is under $100.

Renovations and improvements are another area where people trip up. If you repaint the whole interior, replace the kitchen or add a bathroom, that's not a repair. It's an improvement, and the cost gets depreciated over a much longer period. The difference matters because a repair gives you the deduction now, while an improvement spreads it out over decades. If you're not sure which category something falls into, speak to your accountant before you lodge.

Negative Gearing and the Proposed Changes from July 2027

Negative gearing lets you offset a rental loss against your other income, usually your salary. If your property costs more to hold than it earns in rent, that loss reduces your taxable income and cuts your tax bill. It's been part of the system for decades, and it's one of the main reasons people borrow heavily to invest in property.

From 1 July 2027, that treatment will only apply to new builds. If you buy an established property after 12 May 2026, any losses will be quarantined. You'll only be able to claim them against rental income from other residential properties or against a capital gain when you sell. The losses don't disappear, they just can't reduce your salary anymore. Properties bought before 12 May 2026 keep the old rules until you sell them.

For Marrickville, where most of the housing stock is older, that means new investors buying into the area after mid-May last year won't get the same tax treatment as those who bought earlier. The quarantined losses carry forward, so they're not lost entirely, but the immediate cash flow benefit disappears. If you're holding multiple properties, you might still be able to use the loss against income from another investment, but it depends on your portfolio.

How Refinancing Affects Your Tax Deductions

If you refinance your investment loan, the interest on the new loan is still deductible as long as the borrowed funds are still tied to the investment property. Where it gets messy is if you pull out equity and use it for something else. If you release $100,000 in equity to buy a car or renovate your own home, the interest on that $100,000 isn't claimable because it's not being used to earn income.

Keep the loans separate if you're using equity for multiple purposes. If you're pulling equity to buy a second investment property, that's fine. The interest on the new loan is deductible because it's funding another income-producing asset. But if you're mixing personal and investment purposes in the one loan split, you'll need to keep detailed records so your accountant can separate the deductible and non-deductible portions.

Some investors refinance to switch from principal and interest to interest only, or to get a lower rate. Both of those moves can improve cash flow and increase the amount you're claiming each year. Just make sure the break costs or exit fees don't wipe out the benefit, especially if you're coming off a fixed rate early.

Borrowing Capacity and Rental Income Calculations

Lenders don't count all your rental income when they assess how much you can borrow. Most will only use 80 per cent of the rent to account for vacancy periods, maintenance and management costs. So if your Marrickville property brings in $750 a week, the lender will only count $600 in their serviceability calculation. That makes a difference when you're trying to borrow for a second property or when you're refinancing and the lender reassesses your position.

If you're holding multiple properties, the rental income from all of them gets shaded the same way, and the interest on all the loans gets added to your commitments. That can reduce your borrowing capacity quickly, even if you're positively geared on paper. Some lenders are more generous with rental income treatment than others, which is where a broker helps. We see this often with Marrickville investors who own a unit locally and are trying to add a second property out in the suburbs where yields are higher.

The APRA serviceability buffer also plays a role. Lenders have to assess your loan at least 3 percentage points above the actual rate. So if you're on a 6 per cent variable rate, they're testing you at 9 per cent. That's tougher than it used to be, and it's one reason why interest only loans have become harder to access unless your deposit and income are solid.

Maximising Deductions Without Overcomplicating Your Return

Keep your records in one place. Bank statements, invoices, strata notices, insurance renewals and property management statements all need to be filed so your accountant can pull together your return without chasing you for paperwork. If you're claiming depreciation, keep the quantity surveyor's report on file because the ATO can ask for it years later.

Don't try to claim things that aren't allowed. The ATO has seen every trick, and investment property deductions are one of the areas they audit regularly. If you're claiming travel to inspect the property, you can only do that in limited circumstances, and it's usually not worth the risk. If you're claiming for time spent managing the property yourself, that's not allowed either unless you're running a business.

Talk to someone who knows property tax, not just a generalist accountant. The rules around depreciation, capital works deductions and loan interest splitting are specific, and a good accountant will find deductions you didn't know existed. They'll also tell you what not to claim, which is just as valuable. If you're trying to build a portfolio or you're planning to sell in the next few years, you need advice that accounts for the proposed CGT changes as well.

Call one of our team or book an appointment at a time that works for you. We work with investors across Marrickville and the inner west, and we'll help you structure your investment loan in a way that makes sense for your tax position and your long-term plans.

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