Top Strategies to Use Negative Gearing on Investment Loans

What Negative Gearing Actually Means for Your Investment Loan

Negative gearing happens when the interest and holding costs on your investment property exceed the rental income it generates. You can deduct that loss against your other income, which usually means your salary, reducing the tax you pay each year.

The appeal is straightforward. You accept a temporary loss on paper while the property appreciates, then realise a capital gain when you sell. The rental shortfall is offset by tax relief, and the growth is where you build wealth. For properties held before 12 May 2026, losses can be deducted against all forms of income. For established properties purchased after that date, from the 2027-28 income year onward, losses can only be offset against other residential property income, including capital gains on residential property. New builds remain exempt and can continue to be negatively geared against any income.

Consider a buyer who purchases an established apartment in Southport for rental purposes after 12 May 2026. Annual interest is $28,000, body corporate fees are $6,500, council rates and insurance add another $4,000, and rental income is $32,000. The property runs at a $6,500 loss each year. Under the new rules, that loss can only be deducted against other residential property income. If the investor has no other rental properties and no residential capital gains in that year, the loss is carried forward. When the property is eventually sold, the carried forward losses reduce the taxable capital gain. If the investor also owns a second rental property generating positive income, the loss from the Southport apartment can offset that income immediately.

How Investment Loan Structure Affects Your Tax Position

An investment loan should be set up to maximise deductible interest without mixing it with non-deductible debt. Any borrowing used to acquire or hold a rental property generates deductible interest. Borrowing for private purposes, such as renovations to your own home or a holiday, does not, regardless of what security you use.

Keep the investment loan separate. If you refinance and draw down extra funds for personal use, that portion of the interest becomes non-deductible. If you use equity from your home to fund the deposit on an investment property, the new loan secured against your home is still deductible because the purpose of the borrowing is investment, not the security used. The Australian Taxation Office looks at what you spent the money on, not which property the mortgage is attached to.

In a scenario where an investor releases $120,000 in equity from their Mermaid Waters home to purchase a rental property in Varsity Lakes, the interest on that $120,000 is deductible because it was used for investment purposes. If they later top up that loan by $30,000 to renovate their own kitchen, only the interest on the original $120,000 remains deductible. The interest on the $30,000 top-up is private and cannot be claimed. Keeping loans in separate accounts from the outset avoids this problem entirely.

Interest Only or Principal and Interest for Negative Gearing

Interest only repayments maximise your deductible interest and keep your annual tax deduction higher. You pay only the interest each month, typically for a fixed period of one to five years, and the loan balance does not reduce. Principal and interest repayments include both interest and a portion of the loan amount, so the deductible interest decreases each year as the balance falls.

For an investor focused on maximising tax relief and cashflow in the early years, interest only loans are a common choice. Rental income covers or partially covers the interest, and the tax deduction absorbs the shortfall. The downside is that the loan balance remains unchanged, and when the interest only period ends, repayments revert to principal and interest at a higher amount.

Interest only works when the investment strategy relies on capital growth rather than debt reduction. If the goal is to pay down the loan and build equity faster, principal and interest may be preferable, though the tax benefit is smaller. Some investors use a split loan structure, with part of the borrowing on interest only and part on principal and interest, balancing tax efficiency with gradual debt reduction. The choice depends on your income, other deductions, and how long you plan to hold the property.

Variable or Fixed Interest Rates for Investment Property

A variable rate investment loan moves with the market. When the Reserve Bank changes the cash rate, your rate typically follows within weeks. You can make extra repayments or pay out the loan early without penalty, and most variable rate products include an offset account, which reduces the interest charged without reducing the loan balance.

A fixed rate locks in your interest rate for a set period, usually one to five years. Your repayments stay the same regardless of rate movements, which helps with budgeting and protects you if rates rise. The offset account is often not available on fixed rate loans, and if you break the loan early or make large extra repayments, break costs can apply.

For a negatively geared property, the offset account available on a variable rate can be particularly useful if you hold surplus cash. Every dollar in the offset reduces the interest you are charged, which improves cashflow without reducing your deductible loan balance. For example, if you have a $500,000 loan at a variable rate and $20,000 sitting in an offset account, you are only charged interest on $480,000, but you can still claim interest deductions as if the full $500,000 is outstanding. The offset does not reduce the loan amount for tax purposes, it just reduces the interest cost.

Loan to Value Ratio and Lenders Mortgage Insurance

The loan to value ratio is the amount you borrow as a percentage of the property's value. At 80 per cent LVR or below, you generally avoid paying Lenders Mortgage Insurance. Above 80 per cent, LMI is added to cover the lender's risk, and the cost increases steeply as the LVR rises.

LMI is a one-off premium calculated on the loan amount and LVR. It can be paid upfront or capitalised into the loan. The premium itself is not tax deductible, though if you capitalise it into the loan, the interest on that portion is deductible. Some lenders allow LVRs up to 90 or 95 per cent for investment properties, but the LMI cost at those levels can run into tens of thousands of dollars.

For an investor borrowing 85 per cent to purchase a rental property on the northern Gold Coast, the LMI premium might be $8,000 on a $450,000 loan. If that premium is added to the loan, the total borrowing becomes $458,000, and the interest on the full amount is deductible. The LMI itself, however, is a capital cost and is not immediately deductible. Stamp duty on the LMI premium may also apply depending on the state.

Rental Income, Vacancy Rates and Serviceability

Lenders assess your ability to service an investment loan by applying a serviceability buffer, currently 3 percentage points above the loan product rate, and factoring in a rental income shading of around 20 per cent. That shading accounts for vacancies, maintenance and periods without a tenant. If the property generates $500 per week in rent, the lender assumes $400 per week for serviceability purposes.

Vacancy rates vary across the Gold Coast. Suburbs close to Griffith University or the hospital precinct, such as Southport and Labrador, tend to have strong rental demand and lower vacancy periods. Outer areas or those with high levels of new apartment supply can experience longer vacancies, particularly outside peak tourist or university intake periods. Your borrowing capacity depends on how much rental income the lender recognises and how that stacks up against your other commitments.

If the rental income after shading does not cover the interest and you are negatively gearing the property, the lender adds the shortfall to your other monthly expenses when calculating serviceability. You need enough surplus income after all expenses, including the investment property shortfall, to meet the lender's criteria. In our experience, investors with high taxable income can support larger shortfalls, but those on tighter margins may need to structure the loan to minimise the deficit or choose a property with stronger rental yield.

Claimable Expenses Beyond Interest

Interest is the largest deduction, but it is not the only one. Council rates, water rates, insurance, property management fees, repairs, pest control, gardening and body corporate fees are all deductible. Depreciation on the building and fixtures can also be claimed, though rules around plant and equipment depreciation for second-hand properties were tightened in previous years.

Repairs are immediately deductible if they restore the property to its previous condition. Improvements that add value, such as renovating a kitchen or adding a deck, are capital works and must be depreciated over time. Loan establishment fees and mortgage broker fees can be deducted over five years or the term of the loan, whichever is shorter. Legal fees for the purchase are not deductible but form part of the cost base when calculating capital gains.

Keep detailed records and separate investment expenses from personal costs. If you travel to inspect the property or meet with a property manager, those costs may be deductible if the primary purpose is managing the investment. A quantity surveyor's depreciation schedule is typically a worthwhile investment, particularly for newer properties or those with recent renovations, as it identifies all claimable depreciation across the building and fittings.

Refinancing an Investment Loan to Improve Cashflow

If your current investment loan is on a higher rate or lacks features such as an offset account, refinancing can reduce your interest cost, improve your cashflow and increase your deductible interest if you consolidate investment debt. Refinancing also allows you to release equity for further investment without selling an existing property.

When you refinance, discharge fees, break costs on a fixed rate loan, and new establishment fees all apply. If the interest saving outweighs those costs within a reasonable period, refinancing makes sense. Some of the refinancing costs are deductible over time, such as new loan establishment fees, which are deductible over the shorter of five years or the loan term. Discharge fees on the old loan are also deductible in the year they are incurred.

Refinancing is also the point at which you can restructure debt to separate investment and private borrowings if they have become mixed. A clear separation protects your deductions and simplifies record keeping for tax purposes. If you are planning to acquire another investment property and need to demonstrate borrowing capacity, refinancing can consolidate debt and free up serviceability, particularly if you move from principal and interest to interest only or remove LMI by reaching 80 per cent LVR through natural property appreciation.

Negative gearing is not a set-and-forget strategy. It works when the property is held long enough for capital growth to exceed the cumulative losses, when the tax benefit is genuinely useful to your situation, and when the loan is structured to preserve every dollar of deductible interest. The rules introduced in mid-2026 mean new purchases of established properties face different treatment, so timing and property type now matter more than they did.

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