If you hold an investment property, the interest on your loan is deductible against your rental income.
That single principle drives most property investment decisions for ADF members. The deduction reduces your taxable income, which in turn reduces your tax liability. From 1 July 2027, that principle remains intact, but new rules will quarantine how you can use rental losses if you buy an established property after mid-May this year.
What You Can Claim on an Investment Property Loan
Interest on borrowings used to acquire or hold a rental property is deductible to the extent the property is rented or genuinely held to produce income. You can also claim ongoing costs including body corporate fees, council and water rates, landlord insurance, property management fees, repairs and maintenance, and depreciation on qualifying fixtures and fittings. Stamp duty and settlement costs are not immediately deductible but form part of your cost base when calculating capital gains tax on sale.
Consider a Defence member who purchased a townhouse in Kingston before the recent changes took effect. The loan amount was borrowed at a variable interest rate, and the property is managed through a local agent. Annual interest on the loan is around $18,000, while rental income sits at $22,000. After deducting interest, property management, insurance and other claimable expenses, the property produces a modest positive income. That income is added to the member's salary and taxed at their marginal rate, but the deductions reduce the overall tax liability compared to holding no investment at all.
How Negative Gearing Works Under Current Rules
Negative gearing occurs when the total deductible expenses on an investment property exceed the rental income it generates. Under current rules, that net rental loss can be offset against your salary or other assessable income, which reduces your total taxable income for the year. The difference is claimed in your annual tax return.
Properties held before 7:30pm AEST on 12 May this year retain access to these arrangements indefinitely, even after the new rules commence on 1 July 2027. If you bought before that time or exchanged contracts before that time, your investment loan continues under existing settings until you sell.
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The Quarantining Rule for Properties Acquired After May This Year
Net rental losses on residential properties acquired on or after 7:30pm AEST on 12 May 2026 will be quarantined from 1 July 2027. Those losses can only be offset against other residential rental income in the same year, or carried forward to offset future residential rental income or capital gains when you sell. They cannot reduce your salary, wages or other non-residential income.
If you bought between mid-May and 30 June 2027, you can still claim losses against your salary until 30 June 2027, then the quarantine applies from that point forward. Losses accrued during that transitional period are not lost, they are carried forward and remain available to offset future residential income or gains.
Eligible new builds are exempt from the quarantine. That means a dwelling constructed on previously vacant land, or a development that increases the total number of dwellings on a site, retains full access to negative gearing for the first investor who purchases it. A knock-down rebuild that results in the same number of dwellings does not qualify. If a new build is occupied by the developer or another party for more than 12 months before being sold to an investor, the exemption is lost for that subsequent purchaser.
Capital Gains Tax Treatment From July 2027
From 1 July 2027, 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 capital gains. The change applies only to gains that accrue after 1 July 2027. Gains accrued before that date continue under current discount rules.
If you purchased an investment property in early 2026 and hold it for ten years, the gain up to 30 June 2027 will be calculated under the 50 per cent discount method, while the gain from 1 July 2027 onward will be indexed and subject to the minimum rate. Eligible new residential properties allow an election between the discount and indexation methods. The main residence exemption is unchanged.
Interest-Only Repayments and Deductibility
Interest-only repayment structures are common on investment property loans because they maximise the deductible component while keeping repayments lower during the holding period. Principal repayments are not deductible. When you pay down principal, you reduce the loan balance but gain no immediate tax benefit.
If you refinance or redraw funds from an investment loan for private purposes, the interest on that portion is not deductible regardless of the security provided. Deductibility is tied to the use of funds, not the asset securing the loan. Mixing private and investment purposes in the same loan account requires careful record-keeping and may require separate loan splits to preserve clarity.
Rental Income, Vacancy Periods and Serviceability
Lenders apply a serviceability buffer when assessing investment loan applications. Rental income is typically shaded by 20 per cent to account for vacancy, management costs and periods between tenants. The loan must be serviceable at a rate at least 3 percentage points above the product rate, and debt-to-income caps apply separately to investor and owner-occupier lending from February this year.
If you are posted to Forrest and hold an investment property elsewhere, rental income can support your borrowing capacity for a new purchase, but lenders will assess the net position after deductions and shading. A property generating strong rental yield improves your capacity. A negatively geared property with high vacancy reduces it, even though the tax benefit may make the investment viable over the longer term.
Where ADF Members in Forrest Should Focus
Forrest sits within the Parliamentary Triangle and is bordered by government departments, national institutions and established residential precincts. Most ADF members posted here are based at Russell Offices or other Defence facilities in the ACT. Rental demand in Canberra remains supported by the public service workforce and limited new supply in inner suburbs, but investor appetite has been tempered by the updated tax settings.
If you are considering adding to your portfolio, the distinction between established dwellings and eligible new builds now carries significant long-term tax consequences. The choice is not about which property type performs better in isolation, it is about which structure aligns with your income profile, your holding period, and your tolerance for carrying forward losses rather than claiming them immediately.
We regularly see members weigh the upfront cost and settlement risk of a new build against the cash flow impact of quarantined losses on an established property. Both paths remain viable depending on your circumstances, but the decision requires current numbers and a clear view of your projected income over the next several years.
Frequently Asked Questions
Can I still claim investment loan interest as a tax deduction?
Yes. Interest on borrowings used to acquire or hold a rental property remains deductible to the extent the property is rented or held to produce income. The deduction applies regardless of when you purchased the property.
What happens to my rental losses if I bought an investment property after May 2026?
From 1 July 2027, net rental losses on residential properties acquired on or after 7:30pm AEST on 12 May 2026 are quarantined. They can only offset other residential rental income or be carried forward to offset future residential income or capital gains. They cannot reduce your salary or wages.
Are new builds treated differently under the updated tax rules?
Yes. Eligible new residential dwellings, such as those constructed on previously vacant land or developments that increase dwelling numbers, retain full access to negative gearing for the first investor. This exemption does not apply to knock-down rebuilds that do not increase dwelling numbers.
How does the capital gains tax change affect investment properties?
From 1 July 2027, the 50 per cent CGT discount is replaced with cost base indexation and a minimum 30 per cent tax rate on real gains. The change applies only to gains accruing after that date. Gains before 1 July 2027 continue under the existing discount method.
Does rental income help my borrowing capacity for a new loan?
Yes, but lenders shade rental income by around 20 per cent and assess serviceability at a rate 3 percentage points above the product rate. A positively geared property improves your capacity, while a negatively geared property may reduce it depending on the net position.
