How to Structure Your Home Loan Around Property Tax Rules

Borrowing decisions made now carry tax consequences that extend years into the future, particularly if you're considering investment property alongside your owner-occupied home.

Frankston's mix of coastal owner-occupied homes near Olivers Hill and established investor-focused properties around Frankston South and Karingal means residents here often move between property types as their circumstances change. The tax reforms that came into effect from May 2026 create a dividing line between properties purchased before and after that date, and your loan structure needs to account for which side of that line you sit on.

What Changed for Investment Property Borrowing from May 2026

Losses on established investment properties purchased after 12 May 2026 can only be offset against income from other residential properties, not against your salary or wage income. Losses on properties held before that date, or on new builds purchased any time, continue to be fully deductible against all income. The restriction applies from the 2027-28 income year.

Consider a buyer who purchased an established townhouse in Seaford in early 2026 as an investment. Rental income is $28,000 annually, while interest and other holding costs total $35,000. The $7,000 loss can be deducted against their wage income when lodging their tax return for 2027-28 and beyond. A buyer purchasing a similar property in the same street in August 2026 cannot deduct that loss against wages from 2027-28 onwards. The loss can only offset future rental income or capital gains on residential property, and unused losses carry forward.

This affects borrowing in two ways. First, your post-tax cash flow position changes depending on when you purchased. Second, if you're planning to hold multiple properties over time, the order in which you purchase and the loan structure you choose become more significant.

How Capital Gains Tax Treatment Affects Your Loan Timeline

From 1 July 2027, capital gains on residential investment properties are taxed differently depending on when you bought. Gains accruing before that date attract the 50 per cent discount for assets held longer than 12 months. Gains accruing from 1 July 2027 onwards are calculated using cost base indexation and a 30 per cent minimum tax rate on the indexed gain. For new builds, you can choose between the old discount method and the new indexation method at the time you sell.

A property purchased in Frankston in August 2026 and sold in August 2029 has three years of holding time split across two tax regimes. The portion of the gain that accrued from August 2026 to June 2027 receives the 50 per cent discount. The portion from July 2027 to August 2029 is subject to indexation and the 30 per cent minimum rate. The ATO will require apportionment based on the time held in each period.

If you're using an investment loan with a planned hold period, the structure of your repayments and the timeline for paying down principal can influence your after-tax return. Interest-only periods that extend beyond mid-2027 mean you preserve more capital for other uses, but you also carry a higher loan balance through a period where tax treatment on the gain becomes less favourable compared to the pre-2027 rules.

Splitting a Loan Between Owner-Occupied and Investment Purposes

Many Frankston households purchase their first home with the intention of retaining it as an investment once they upgrade. If you currently live in a property and later convert it to an investment, the loan remains deductible even if it was originally taken out for owner-occupied purposes, provided the funds were used to purchase or improve the property and the property is now genuinely available for rent.

The date you purchased the property governs which negative gearing rules apply, not the date you converted it to an investment. A home purchased in Frankston in 2024 and converted to a rental in 2028 remains under the old tax treatment because it was held at 12 May 2026.

If you take out a new loan to purchase an owner-occupied home and later decide to rent out that home while moving elsewhere, the entire loan becomes deductible against the rental income once the property is available for rent. If you refinance the loan or redraw funds after the conversion, the deductibility of those redrawn funds depends on what you use them for. Funds used for private purposes, such as buying a car, are not deductible even if secured against an investment property.

Using Offset Accounts to Preserve Deductibility on Future Investments

An offset account linked to your owner-occupied home loan reduces the interest you pay without reducing the loan balance itself. This distinction becomes relevant if you later convert your home to an investment property. The loan balance at the time of conversion determines the maximum deductible amount. Funds sitting in an offset account do not reduce that balance, so the full loan remains deductible once the property becomes an investment.

A Frankston buyer purchasing a home in 2026 with a $600,000 loan might pay down $100,000 in principal over five years, reducing the loan to $500,000. If they convert the property to an investment, only $500,000 of any future loan balance is deductible. If instead they had placed $100,000 into an offset account and made interest-only payments, the loan balance remains $600,000 and the full $600,000 is deductible once converted.

This approach requires discipline and a clear intention to retain the property as an investment in future. It also means you continue paying interest on a higher loan balance in the short term, even though the offset reduces the net cost. For buyers in Frankston who plan to upgrade from a property near Frankston High School to something closer to the waterfront at Olivers Hill, structuring the initial loan with an offset can preserve more deductions when the first property transitions to a rental.

Pre-Approval and Loan Structuring Before You Purchase

Obtaining home loan pre-approval before you sign a contract gives you certainty around your borrowing capacity, but it also gives you time to consider how the loan should be structured based on your medium-term plans. Lenders assess serviceability using a buffer of at least 3.0 percentage points above the loan product rate, so your capacity is tested at a higher rate than you'll initially pay.

If you're purchasing an investment property in Frankston after May 2026, the lender's serviceability assessment does not automatically account for the restriction on loss offsets that will apply from the 2027-28 income year. The assessment is based on your current income and expenses. Once the new rules take effect, your actual after-tax cash flow may be lower than your pre-purchase projection if you were expecting to offset the loss against wage income.

Working with a mortgage broker in Frankston gives you access to lenders who can structure the loan as a split between fixed and variable, or set up interest-only and principal-and-interest components separately. A split structure allows you to fix part of the loan if you want rate certainty through the period when the new tax rules commence, while keeping part variable if you plan to make additional repayments or pay down the loan ahead of schedule.

Refinancing an Existing Loan After the Tax Rule Changes

If you purchased an investment property before May 2026 and you refinance the loan after that date, the original tax treatment continues to apply provided the refinance is for the same purpose and does not increase the deductible amount beyond what was originally borrowed for the property. Refinancing to access equity for a separate investment may create a new loan subject to the post-May 2026 rules, depending on how the funds are used and whether the lender structures it as a separate facility.

Frankston property owners who hold an investment property purchased in 2025 and want to access equity in 2027 to purchase a second investment property should ensure the new borrowing is structured as a separate loan facility. The original loan retains its grandfathered treatment, and the new loan is assessed under the current rules. Mixing the two loans into a single refinanced facility can create complications in claiming deductions, as the ATO requires clear traceability between borrowed funds and their purpose.

Call one of our team or book an appointment at a time that works for you to discuss how your current loan structure aligns with the tax rules that apply to your property.

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