Investment Property Loans in Australia: Negative Gearing, Tax Deductions, and Loan Structures Explained

How Investment Loans Differ from Home Loans

Lenders treat investment loans differently from owner-occupier loans. Here is what changes.

• Interest rates are typically 0.25% to 0.50% higher than comparable owner-occupier rates. On a $600,000 loan, that is $1,500 to $3,000 more per year in interest.
• Some lenders cap the loan-to-value ratio (LVR) at 80% for investment properties, meaning you need a bigger deposit. Others will go to 90% but you will pay LMI.
• Lenders discount your expected rental income when assessing serviceability. Most banks only count 80% of the rent you expect to receive, to account for vacancies and expenses.
• The APRA debt-to-income (DTI) cap of 6 hits investors harder because existing property debt counts toward the ratio. If you already have a home loan, your capacity for an investment loan is reduced.

Use our Borrowing Capacity Calculator to see how much you could borrow for an investment property based on your income and existing debts.

Negative Gearing Explained

Negative gearing is one of the most talked-about concepts in Australian property investment, and also one of the most misunderstood.

It simply means that the costs of owning your investment property (loan interest, management fees, insurance, repairs, rates) are more than the rental income you receive. You are making a loss on the property.

The tax benefit is that this loss can be deducted from your other income (like your salary), which reduces the amount of tax you pay.

Here is an example. Say your investment property earns $25,000 per year in rent but costs you $35,000 per year (interest, rates, insurance, management, repairs). That is a $10,000 loss. If you are on a 37% tax rate, that $10,000 loss reduces your tax bill by $3,700.

But here is the part that gets lost in the conversation. You are still $6,300 out of pocket. You lost $10,000 and got $3,700 back in tax savings. Negative gearing does not make you money on its own. The real play is that you are banking on the property increasing in value over time (capital growth) to more than make up for the annual loss.

If the property does not grow in value, you have just been losing money every year. This is why location and property selection matter so much.

What about positive gearing?

Positive gearing is the opposite. Your rental income exceeds your costs. The property is cash-flow positive. You still pay tax on the profit, but you are not losing money each year. Some investors prefer this approach, especially if they want income now rather than relying entirely on future capital growth.

Tax Deductions for Property Investors

As an investor, you can claim a range of expenses against your rental income. Here are the main ones.

• Loan interest. This is usually the biggest deduction, making up 60% to 70% of total claims for most investors. Only the interest is deductible, not the principal repayments.
• Property management fees. If you use a property manager, their fees (typically 7% to 10% of rent) are fully deductible.
• Insurance. Landlord insurance, building insurance, and contents insurance are all deductible.
• Council rates and water rates.
• Body corporate or strata fees.
• Repairs and maintenance. Things like fixing a leaky tap, repainting, or replacing a broken appliance are immediately deductible. But there is a catch: capital improvements (like adding a new bathroom or renovating a kitchen) are not immediately deductible. They are depreciated over time.
• Pest control, gardening, and cleaning between tenants.
• Legal expenses related to the tenancy (not the purchase).
• Depreciation on the building and fittings (covered in the next section).

Keep good records. The ATO is increasingly using data matching to cross-check rental income and deductions. A good accountant who specialises in property investment is worth their fee many times over.

Depreciation

Depreciation is a non-cash deduction. It means you can claim the wear and tear on the building and its contents as a tax deduction, even though you have not spent any money.

There are two types.

Building (Division 43)

For properties built after 1987, you can claim 2.5% of the original construction cost per year. On a property where the building component cost $400,000, that is a $10,000 deduction every year for 40 years. You do not need to spend a cent to claim it.

Fixtures and fittings (Division 40)

Items like carpets, blinds, hot water systems, ovens, and air conditioning units all depreciate at different rates. Carpet might be depreciated over 10 years, a hot water system over 12 years.

To claim depreciation, you need a quantity surveyor to prepare a depreciation schedule. This costs $500 to $800 and is itself tax-deductible. For a newer property, the schedule can unlock $5,000 to $15,000 or more in deductions per year.

One rule change to be aware of. Since May 2017, if you buy a second-hand investment property, you can no longer claim depreciation on existing fixtures and fittings (Division 40 items). You can still claim building depreciation (Division 43) and any new items you install.

Loan Structure

How you structure your investment loan matters more than most people realise. Get it wrong and it can cost you thousands in lost tax deductions and create unnecessary risk.

Never cross-collateralise

Cross-collateralisation means using your home as security for your investment loan (or vice versa). Some lenders push this because it makes things easier for them. But it ties your properties together. If something goes wrong with one, the lender can go after the other.

Keep each property on a separate loan with its own security. This protects you and gives you flexibility to sell one without affecting the other.

Keep investment and personal borrowing separate

The ATO looks at the purpose of each loan to determine what interest is deductible. If you mix personal and investment borrowing in the same loan account, it gets messy. Keep them completely separate.

Use an offset, not redraw, for investment loans

As we covered in our Offset vs Redraw guide, redrawing extra repayments on an investment loan can affect the tax deductibility of the interest. An offset account keeps your loan balance unchanged and your deductions clean.

Interest-Only vs Principal and Interest

Many investors choose interest-only (IO) loans for their investment properties. With an IO loan, you only pay the interest each month. You do not pay down the principal at all during the IO period (usually one to five years).

Why would you do this? Two reasons.

First, lower repayments. On a $600,000 loan at 6.5%, the interest-only repayment is about $3,250 per month. The principal and interest (P&I) repayment would be about $3,790. That is $540 per month less.

Second, tax maximisation. Because you are not reducing the loan balance, the full interest amount remains deductible. If you are negatively geared, this maximises your tax deduction.

The downside is that you are not building any equity through repayments. When the IO period ends, your repayments jump up because you now have to pay principal and interest on the full balance over a shorter remaining term.

Interest-only is a tool, not a default. It works well when cash flow is tight or when you are redirecting the savings toward paying down non-deductible debt (like your home loan) faster. But it is not free money. You pay more total interest over the life of the loan.

Using Your Home Equity to Buy an Investment Property

If your home has increased in value since you bought it, you may have enough usable equity to fund the deposit on an investment property without touching your savings.

Usable equity is the difference between your home value and 80% of its value, minus what you currently owe. For example, if your home is worth $800,000 and you owe $400,000, your usable equity is ($800,000 x 80%) minus $400,000, which equals $240,000.

That $240,000 could be used as a deposit and to cover purchase costs on an investment property. The interest on this equity release is tax-deductible because the purpose of the borrowing is investment.

This is a common strategy, but it does increase your total debt. Make sure you can comfortably service both loans, even if rates rise or the property is vacant for a period.

Our Borrowing Capacity Calculator can help you understand how much additional borrowing you could support based on your income and existing debts.

Capital Gains Tax When You Sell

When you sell an investment property, any profit (capital gain) is added to your taxable income for that year and taxed at your marginal rate.

If you have held the property for more than 12 months, you get a 50% CGT discount. Only half the gain is added to your income. This is a significant benefit and one of the main reasons investors hold properties long-term.

Your capital gain is calculated as the sale price minus your cost base. The cost base includes the original purchase price, stamp duty, legal fees, and any capital improvements you made. It does not include deductible expenses like repairs or interest.

One thing to watch. Any depreciation you have claimed on the building or fittings reduces your cost base. So if you claimed $50,000 in depreciation over the years, your cost base is reduced by $50,000, which increases your capital gain when you sell. The depreciation is effectively recaptured at sale.

CGT planning is complex. A good accountant can help you time the sale and structure things to minimise your tax.