Unlock the Secrets to Investment Loan Tax Deductions

Investment property tax deductions reduce your taxable income when you own a rental property.

For ADF members in South Australia, the rules changed in the 2026-27 Federal Budget. If you bought an established property after 12 May 2026, negative gearing and capital gains tax treatment will shift from 1 July 2027. Properties purchased before that date keep the existing arrangements. New builds retain favourable treatment under both measures.

What You Can Claim as an Investment Property Expense

You can deduct any expense directly related to earning rental income. Loan interest is typically the largest deduction, followed by property management fees, council rates, water charges, insurance, repairs, and depreciation on fixtures and fittings. You cannot claim the cost of improvements that add lasting value to the property, but you can claim repairs that restore it to its original condition.

Consider a Navy member posted to HMAS Cairns who owns a rental property in Adelaide's inner south. The property earns $28,000 in annual rent. Deductible expenses include $18,000 in loan interest, $2,200 in property management fees, $1,800 in council rates, $900 in landlord insurance, and $1,500 in depreciation. Total deductions reach $24,400. The net rental income is $3,600, which is added to assessable income. If expenses had exceeded rental income, the loss would offset other income under the old rules. Under the new rules applying from July 2027 for properties bought after Budget night, that loss can only offset rental income or capital gains from residential property.

How Negative Gearing Works Under the New Rules

Negative gearing lets you claim a tax deduction when your rental property costs more to hold than it earns. From 1 July 2027, losses on established residential properties acquired after 12 May 2026 can only be deducted against rental income or capital gains from residential property, not against salary or wages. Losses can be carried forward indefinitely to offset future residential property income, so the deduction is deferred rather than lost.

If you bought your investment property before 13 May 2026, you retain full negative gearing. If you are buying a new build, you also retain full negative gearing regardless of purchase date. Commercial property and other asset classes such as shares remain unchanged.

Interest Only Loans and Deductibility

All interest on an investment loan is deductible as long as the loan is used to purchase or improve an income-producing property. Interest only loans are common among property investors because they maximise cash flow and tax deductions during the interest only period. Principal repayments are not deductible, so deferring them means a larger deduction each year.

An Army officer stationed at Edinburgh Defence Precinct might hold an interest only loan on a rental property in Salisbury. The loan balance is $420,000 at a variable rate. Annual interest is approximately $21,000, all of which is deductible. If the loan were principal and interest, annual repayments would be higher, but only the interest component would be deductible. The principal portion builds equity but does not reduce taxable income.

Depreciation on Plant and Equipment

Depreciation allows you to claim the decline in value of assets within the property over time. Plant and equipment includes items like hot water systems, ovens, air conditioners, and carpet. The building structure itself can also be depreciated if construction was completed after 1987. You need a quantity surveyor's depreciation schedule to claim these deductions accurately.

For properties in South Australia, older character homes in suburbs like Norwood or Unley may have limited plant and equipment depreciation, while newer apartments near the Adelaide CBD or in Mawson Lakes can generate several thousand dollars in annual depreciation deductions. A quantity surveyor's report typically costs between $500 and $800 and is itself a deductible expense.

Capital Gains Tax Changes from July 2027

From 1 July 2027, the government will replace the 50% capital gains tax discount with a discount based on inflation indexation and introduce a minimum 30% tax on capital gains. The changes only apply to gains arising after 1 July 2027. If you bought your investment property before that date, gains accrued up to 30 June 2027 are calculated under the old rules.

Investors in new builds can choose between the 50% discount or the new arrangements, whichever is more favourable. The main residence exemption remains unchanged. ADF members who are Age Pension recipients or receive certain income support payments are exempt from the minimum tax.

Loan Structure and Deduction Maximisation

Keeping your investment loan separate from your home loan protects the deductibility of interest. If you refinance and blend the two, or if you redraw funds from an investment loan for personal use, the ATO may disallow part of the interest deduction. Maintaining a clear separation between investment borrowing and personal borrowing is one of the most effective ways to preserve deductions over the long term.

If you are considering refinancing your investment loan, ensure the new loan is used exclusively for the investment property. If you are planning to expand your property portfolio, structure each loan separately so interest on each property remains fully deductible.

Claimable Costs at Purchase and Sale

Stamp duty, conveyancing fees, and building and pest inspections are not deductible in the year you incur them. Instead, they form part of the cost base of the property and reduce your capital gain when you sell. Loan establishment fees and lenders mortgage insurance can be claimed over five years or the life of the loan, whichever is shorter.

When you sell, advertising costs, agent commissions, and legal fees related to the sale are added to the cost base and reduce the capital gain. Keeping records of all purchase and sale costs ensures you claim every dollar you are entitled to when calculating capital gains tax.

Records You Need to Keep

The ATO requires you to keep records for five years after you lodge your tax return. For investment properties, that includes loan statements, rental income records, receipts for all deductible expenses, depreciation schedules, and records of any improvements or capital works. If you sell the property, you need records of purchase and sale costs to calculate the capital gain.

Digital records are acceptable. Scanning receipts and storing them in a folder labelled by financial year makes tax time faster and ensures nothing is missed.

Speak to a Tax Professional About Your Situation

Investment property tax is not one size fits all. The new rules apply differently depending on when you bought, what type of property you own, and how you structure your loans. A qualified accountant or tax adviser can review your specific circumstances and confirm which deductions apply to you.

If you are an ADF member in South Australia and you are considering buying your first investment property or refinancing an existing one, call one of our team or book an appointment at a time that works for you. We work with property investors across all ranks and postings and can connect you with lenders who understand investment lending for ADF members.

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