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Buying an investment property in Australia can be one of the most powerful and reliable ways to **build long-term wealth** — but it’s not as simple as picking a suburb and signing on the dotted line. You need to navigate complex tax implications, stringent bank borrowing criteria, and real-world cashflow considerations.

This practical guide cuts through the jargon and explains each crucial step in plain English. We’ll cover everything from how to fund the deposit and understanding rental income, to the mechanics of tax deductions and how **negative gearing** actually works.

Ready to see the real-world impact of the numbers? Use our **[Investment Property Calculator](/calculators/investment-property)** to instantly model rental income, expenses, loan costs, depreciation, and your long-term equity growth potential.

---

## Table of contents

1. [Why investment property works](#how-investment-property-builds-wealth)  
2. [Funding your deposit: cash vs leveraging equity](#how-to-fund-the-deposit-cash-vs-equity)  
3. [The investment property buying process](#understanding-the-buying-process)  
4. [Rental income: What’s taxable?](#rental-income-and-how-it-is-taxed)  
5. [Claiming expenses: What's tax-deductible?](#what-expenses-are-tax-deductible)  
6. [Depreciation and capital works explained](#depreciation-and-capital-works)  
7. [Negative gearing vs positive cashflow](#negative-gearing-vs-positive-cashflow)  
8. [Capital growth and CGT on sale](#capital-growth-and-cgt)  
9. [FAQs](#faq)  
10. [A Note on Advice (Disclaimer)](#disclaimer)

---

## Why investment property works

Property investing is fundamentally a two-pronged strategy for building wealth:

**1. Capital Growth** — This is the long-term appreciation in the property's value. As the value climbs, so does your equity.  
**2. Rental Income** — The rent collected from tenants helps offset or completely cover your loan repayments and running costs.

The key mechanism is **leverage**. Unlike shares, where you use cash, property lets you borrow a significant portion of the asset's value. This means you can control a much larger asset with a relatively small amount of capital.

> **Example:** You invest **$100,000** as a deposit and borrow **$400,000** to buy a $500,000 property. If the property value grows by a modest 6% in one year (a $30,000 gain), that represents a **30% return on your $100,000 equity** — before you even factor in the rental income.

The ability to claim tax deductions on interest and property costs is what truly separates an investment property from your own home.

---

## Funding your deposit: cash vs leveraging equity

When buying an investment property, you’ll usually need a minimum of **20% deposit** to bypass the cost of Lenders Mortgage Insurance (LMI). However, many banks will lend with a deposit as low as **10% or even 5%**, provided you are willing to pay the LMI premium.

### Option 1: Using your cash savings
This is the most straightforward approach, mirroring the process of buying your own home. Your savings cover:

* The required deposit (5%–20%)
* Stamp duty (a major upfront cost)
* Legal/conveyancing fees
* Building & pest inspections
* Settlement adjustments (council rates, water, etc.)

### Option 2: Tapping into your home equity

If you already own a home, you have a powerful tool at your disposal: **borrowing your deposit using the equity you’ve already built up.**

**The Usable Equity Formula:**

(Home Value × 80%) − Outstanding Mortgage = Available Equity

**Example:**
* Home value: $800,000  
* Outstanding Mortgage: $400,000  
* 80% of Home Value: $640,000  
* **Usable Equity:** $240,000

This $240,000 is potentially available to fund the deposit (or even the entire purchase) of your investment property.

> **Crucial Tip:** When extracting equity, it’s best practice to use a separate loan account (known as a split facility). This clearly separates your deductible investment debt from your non-deductible home loan debt, making tax time far simpler.

---

### Key differences in funding approaches

| Funding Approach | Best For | Notes |
|------------------|----------|-------|
| Equity Loan (Split Facility) | Established homeowners, long-term investors | Interest is clearly tax-deductible, ideal for leveraging |
| HELOC / Line of Credit | Investors needing flexible access for renovations or deposits | Higher interest rates, generally variable, can tempt overspending |
| Cash Deposit | First-time property investors | Simple to execute, but means slower entry into the market |

See how different debt structures affect your costs and tax position using the **[Investment Property Calculator](/calculators/investment-property)**.

---

## The investment property buying process

Buying an investment property follows the same fundamental steps as buying an owner-occupied home, but the decision-making criteria are different.

### Your steps to ownership

1. **Secure Finance Pre-Approval**  
   Knowing your precise borrowing limit before you start looking is essential for setting a realistic budget and moving quickly.

2. **Targeted Property Selection**  
   - Your focus shifts from "where I want to live" to "**where tenants want to live**."  
   - Research vacancy rates, median rents, planned infrastructure, and demographic trends.  
   - Prioritise suburbs with proven tenant demand.

3. **Offer and Contract**  
   - Work closely with your solicitor or conveyancer from the moment your offer is accepted (or before an auction).

4. **Cooling Off (Where Applicable)**  
   A cooling-off period (usually 5 business days, but varies by state) is not available if you buy at auction.

5. **Settlement**  
   The final transfer of ownership, typically occurring 30–90 days after the contract is signed.

### Typical Upfront Costs (The Fine Print)

| Expense | Approximate Cost | Note |
|---------|------------------|------|
| Stamp duty | 3–6% of property value (highly variable by state) | **Not deductible** but adds to your cost base. |
| LMI (if deposit is under 20%) | 1–4% of loan amount | Can often be added to the loan amount. |
| Conveyancing/legal | $1,500–$2,500 | Necessary for due diligence. |
| Building & pest inspection | $400–$800 | Critical for avoiding expensive surprises. |
| Valuation fees | $300–$600 | Often charged by the lender. |

---

## Rental income: What’s taxable?

The rent you receive is added to your **taxable income** for the financial year. This includes more than just the monthly rent payment:

* Rent received or due
* Any money the tenant reimburses you for (e.g., utility charges)
* Insurance payouts for lost rent
* Any property-related government grants

**The good news? Rental income is taxed at your marginal rate, but only *after* you have deducted all eligible expenses.**

> If your total deductible expenses (including interest and depreciation) are greater than your rental income, you have a **rental loss**. This is the basis of **negative gearing**, where the loss reduces your overall income tax bill.

---

## Claiming expenses: What's tax-deductible?

You can claim a deduction for almost any expense that is **incurred to generate rental income** and is *not* a capital improvement.

### Ongoing Expenses (Claimed in the year you pay them)

* **Mortgage interest** (the single biggest deduction for most investors)  
* Council rates, water rates, and land tax  
* Landlord insurance and building insurance  
* Property management fees  
* Repairs & maintenance (like fixing a leaky tap)  
* Accounting, legal, and some travel expenses (subject to strict rules)  
* Advertising costs to find a new tenant  
* Depreciation (covered next)  

> **Remember:** Loan **interest** is deductible, but the repayment of the loan **principal** is not.

### Non-Deductible or Capital Costs

| Cost | Tax Treatment | Why it's not a direct deduction |
|------|---------------|--------------------------------|
| Stamp duty | Part of cost base for CGT | It’s considered a cost of *acquiring* the asset. |
| Loan principal repayment | Not deductible | This is paying down debt, not an expense. |
| Renovations and Improvements | Added to cost base or depreciated | These improve the property’s value, they are not simple repairs. |
| Buyer’s agent fees | Capital cost (added to cost base) | Like stamp duty, it's a cost of acquisition. |

---

## Depreciation and capital works explained

Depreciation is a non-cash deduction that allows you to claim the cost of the property's structure and fittings over time, even though you didn't physically spend money on it that year. It's often overlooked but can dramatically improve cashflow.

There are two main categories:

### 1. Capital Works Deduction (Division 43)

This covers the cost of the building’s structure (the roof, walls, foundations, integral plumbing).  
You can typically claim **2.5% of the construction cost per year for 40 years** on residential properties built after 1987.

### 2. Plant and Equipment (Division 40)

This covers the easily removable or mechanical assets within the property, such as carpets, ovens, dishwashers, blinds, and air conditioners.  
These are depreciated over their specific effective life (which can be as short as a few years).

> **To maximise your claims** — especially on newer properties — it is highly recommended to engage a Quantity Surveyor to prepare a detailed **Depreciation Schedule**.

---

## Negative gearing vs positive cashflow

These two terms describe the result of your property’s annual operating budget.

### The Mechanics of Negative Gearing

This occurs when your total **deductible expenses (most notably loan interest)** are greater than the rental income you receive. You operate at a cashflow loss for the year, but that loss is tax-deductible against your other income (e.g., salary).

**Example:**

| Description | Amount |
|-------------|--------|
| Rental income | $28,000 |
| Total expenses | $33,000 |
| **Net Loss (deductible)** | **$5,000** |

If you are on a 37% tax rate, this $5,000 loss reduces your income tax payable by $1,850.

> **Crucial Reality Check:** You are still losing $5,000 cash, offset by a $1,850 tax return. The overall net cash loss is $3,150. **Negative gearing is only profitable if the capital growth of the asset outweighs this cash loss.**

---

### What is Positive Cashflow?

This is the opposite: your rental income exceeds all costs, creating surplus cash. You pay tax on this net profit, but you are earning money month-to-month.

**Both strategies are valid**, but suit different goals:

| Strategy | Pros | Cons |
|----------|------|------|
| **Negative Gearing** | Highest capital growth potential, significant tax benefit | Real cash loss to the investor, vulnerable to interest rate rises |
| **Positive Cashflow** | Immediate income generation, lower personal cash risk | Often lower growth potential (or higher purchase price) to achieve positive cashflow |

You can model the cashflow and tax implications of any property using the **[Investment Property Calculator](/calculators/investment-property)**.

---

## Capital growth and CGT on sale

The goal of long-term property investment is typically capital growth. This growth is only taxed when you finally sell the property — this is the **Capital Gains Tax (CGT)** event.

### Key CGT Rules for Individuals

* **Held for less than 12 months:** The *full* capital gain is added to your taxable income.
* **Held for more than 12 months:** You are eligible for the **50% CGT discount**. Only half of the capital gain is added to your taxable income.
* **The Cost Base:** When calculating your final gain, you can reduce the profit by including all associated purchase costs (stamp duty, agent fees, conveyancing) and the cost of any significant renovations.

### The Power of Compounding

Because you only pay CGT **when you sell**, the returns can compound year after year without being eroded by annual tax. This is a major advantage of property investment.

---

Ready to test different scenarios? Want to compare the returns from a negative gearing strategy versus a positive cashflow one?  
Dive into the data with the **[Investment Property Calculator](/calculators/investment-property)**.

---

## FAQ

**Is rental income considered taxable?**  
Yes. After deducting all eligible expenses, any remaining rental profit is added to your personal taxable income.

**Can I claim interest on the loan used for the deposit?**  
Absolutely — provided the borrowed funds were used directly to purchase or maintain the investment property. This is why a split loan structure is highly recommended.

**Is stamp duty tax deductible?**  
No — it's not deductible in the year you pay it. However, it's added to the property’s cost base, which reduces the capital gain when you eventually sell.

**Can I claim depreciation on older properties?**  
Yes. You can usually still claim the Capital Works Deduction (Division 43) for the building structure. However, claims for Plant & Equipment (Division 40) are generally limited for second-hand residential properties.

---

## A Note on Advice (Disclaimer)

This article contains general information about property investment and tax in Australia. **It does not take into account your personal financial situation, goals, or needs.** You should not rely on this as personal financial, legal, or tax advice. Always seek specific advice from a licensed financial advisor, mortgage broker, or tax professional before making any investment decisions.

---

A step-by-step guide for Australians on buying an investment property — from funding the deposit to understanding income, expenses, tax deductions and capital growth.

Buying an Investment Property in Australia: From Deposit to Tax Benefits


**Debt recycling** is a strategy used by Australian homeowners to pay off their non-deductible home loan faster and build an investment portfolio at the same time.

The aim of the stragegy is to:
- reduce “bad debt” (your home loan),
- increase “good debt” (a tax-deductible investment loan),
- boost after-tax cashflow through franking credits and negative gearing,
- Be in a “debt free” position sooner.

This guide will walk you through:
- what debt recycling actually is,
- what the tax benefits are (why the ATO treats the loans differently),
- step by step how it works in practice,
- who it suits and who it doesn’t suit,
- real risks you need to understand before doing it,
- and how to model it with our free **[Debt Recycling Calculator](/calculators/debt-recycling)**.

---

## Quick Summary: What Is Debt Recycling?

At a high level, debt recycling is the process of gradually replacing non-deductible home loan debt with tax-deductible investment debt.

You do this by:
1. Paying down your home loan (non-deductible debt) with a lump sum (such as funds in an offset account).
2. Redrawing that same amount as an investment loan (deductible debt).
3. Investing the redrawn amount into income-producing assets (typically shares / ETFs / managed funds).
4. Directing all after-tax investment income (including franking refunds and negative gearing tax benefits) back into the home loan to pay it off faster.

You don't need to make extra repayments (although that helps).  
You’re just recycling dollars from the “bad debt” bucket into the “good debt / investment” bucket.

You can simulate that process year-by-year with our **[Debt Recycling Calculator for Australia](/calculators/debt-recycling)**.  
It models franking credits, negative gearing, redraw timing, capital gains tax on exit, and shows when you could theoretically be debt free after selling down your investment portfolio.

---

## Why Home Loan Debt Is ‘Bad Debt’

Your main residence in Australia does not produce assessable income (you don’t earn rent from living in your own house), so:
- The interest on your home loan is not tax-deductible.

That makes it “bad debt”:
- You pay the full cost of the loan from your after-tax income.
- You can’t claim it as a deduction on your tax return.

---

## Why Investment Debt Is Treated Differently

If you borrow money to invest in assets that are expected to produce assessable income (e.g. shares that pay dividends), then:
- The interest on that investment loan is generally tax-deductible in Australia, because it’s incurred in the course of producing income.
- If the interest cost exceeds the income produced by the investment, you are making an investment loss. This is known as negative gearing.
- The investment loss is claimed as a deduction on your tax return, and reduces the amount of income tax payable.  
 
On top of that:
- Australian shares often come with franking credits (imputation credits). Franking credits represent company tax already paid at (usually) 30%, and they’re refundable, meaning if your tax bill is lower than the credits, you may get the difference back as a refund.
- Those franking credits and the tax deduction on interest boost your after-tax income.

That after-tax cash flow is then paid directly into your home loan as additional repayments, helping to pay down your home loan faster.

---

## Step-by-Step: How Debt Recycling Actually Works

Let’s walk through the mechanics using a simplified version of the strategy.

### Step 1. You make an extra repayment into your home loan  
Say you have $30,000 in an offset account and use that to make a lump sum repayment into your home loan.  
This immediately reduces your non-deductible home loan balance.

### Step 2. You redraw that $30,000 as an investment split  
You split your home loan and redraw that same $30,000 as a new, clearly identifiable investment loan split.  
Important: this split must be used only for investment purposes. Mixing purposes (e.g. using redraw for a car, holiday, renovations) risks contaminating the tax deductibility.

### Step 3. You invest that money  
You use the $30,000 investment split to buy income-producing assets such as ETFs or Australian shares. Best practice is to establish a new brokerage account and pay those redrawn funds directly into that account.

Now you’ve got:
- a smaller home loan (non-deductible debt) which has reduced by $30,000, and
- a new investment loan (deductible debt) of $30,000, and
- an investment portfolio worth ~$30,000.

### Step 4. The investments generate cashflow  
Over the next year, those investments (especially Australian shares / ETFs with franked dividends) pay:
- cash distributions, and
- franking credits

Depending on the level of income generated, you may also receive a tax refund from negative gearing, where the investment loan interest is greater than the income earned on your investments.

You take that net cash and pay it into your home loan as extra repayments over the following 12 months.

### Step 5. Repeat annually  
At the end of the year:
- Your home loan is now even lower (because you’ve made your normal repayments plus the investment cashflow).
- You redraw the extra repayments again as a fresh investment split.
- You invest that redrawn amount into your portfolio.
- Your investment loan increases (your home loan balance doesn't change in the step)

That repeating loop is the “recycling”.

You can see this redraw and reinvest cycle, year by year, in the **Year by Year Comparison** table in the calculator.

Try it yourself with the **[Debt Recycling Calculator](/calculators/debt-recycling)**.

---

## The Goal: Be “Debt Free”

We model this by looking at the option of just making your normal home loan repayments vs employing a debt recycling strategy.

### 1. Home loan balance hits $0  
Under Strategy A (just pay the home loan normally), this eventually happens, but it may take decades.

Under Strategy B (debt recycling), the goal is to get there faster. This happens because you’re channelling every after-tax dollar of investment income, franking refunds, and negative gearing benefit to repay your home loan faster.

### 2. “Debt free overall after sell-down”  
In our calculator we also show the year where, if you sold your entire investment portfolio, paid capital gains tax (with the 50% CGT discount assumed), then used the after-tax proceeds to clear both:
- the remaining home loan, and
- the outstanding investment loan

That is your “debt free” crossover in Strategy B.  
In other words: you could liquidate your investment portfolio, pay CGT, repay both your home loan and investment loan, and walk away with a positive cash balance.

On the calculator, this shows up in:
- the summary card “Year you could clear all debt”, and
- the bar chart titled “When will I be debt free?”.

That bar chart compares:
- your remaining home loan in Strategy A, and
- your after-tax “walk away” position in Strategy B.

---

## Does Debt Recycling Mean I’m Paying More Each Month?

Not necessarily.

One of the most misunderstood parts of debt recycling is cashflow. You keep making the same repayments to your home loan in both scenarios. Only in the debt recycling strategy, part of your repayment goes towards your home loan, and a portion goes to your investment loan.

In our model, we ask you for just one number:
- **“Monthly repayment ($/mo)”** → what your current repayments are.

Then we compare that to our calculated minimum repayment required to keep the total debt (home loan and investment loan splits) on track over the remaining term.

If you’re already paying at least that amount, we assume there are no increasing in monthly repayments. You’re just redirecting where those dollars go:
- first to minimum repayment on the (deductible) investment split,
- then the remainder to the (non-deductible) home split,
- plus the after-tax investment income sweep also paid to your home loan.

---

## Should the investment loan be principal and interest or interest only repayments?

Most advisers suggest having your investment loan balance changed to interest only repayments and keep your home loan on principal and interest repayments.
However, there can be a significant differential in interest rates between interest only and principal and interest loans (around 0.60% pa or more). 
Also, lenders will likely ask you to complete a new credit application if you request a switch to interest only repayments.

The general view, given the interest rate differential, is to:
- Keep both loans on principal and interest repayments,
- Make only the minimum required repayment towards the investment loan,
- Pay extra towards the home loan.

We have allowed for different rates between investment loan and home loans in the calculator, but have assumed that both loans have principal and interest repayments.

---

## Who Debt Recycling Can Suit

Debt recycling is generally more appropriate for people who:

- Own (or are buying) their own primary residence with a mortgage in Australia.
- Have a decent income and tax rate (30% marginal tax rate and above), so deductions and franking actually matter.
- Are comfortable holding investments for 10 or more years.
- Can tolerate market volatility without selling.
- Are disciplined enough to direct distributions / refunds back into the home loan.

It can be especially attractive if:
- You’re on a higher marginal tax rate (because deductions and franking credits are more valuable to you).
- You’ve got a solid buffer (e.g. emergency fund, stable employment).
- You wish to invest for long-term wealth creation, as well as pay down your home loan.

---

## When Debt Recycling Is a Bad Idea

Debt recycling comes with additional risk.

It may not be suitable if you:
- Are very uncomfortable with investment risk or market volatility.
- Are likely to need that money in the short term (e.g. for maternity leave, career change, income drop, capital expenses).
- Don’t have an emergency buffer outside this strategy.
- Are already very stretched with repayments.
- Would emotionally struggle if markets fell 30–40% in one year (which may happen).

Specific risks to understand:

### 1. Market risk  
Shares can fall. If you’ve geared into investments and markets fall, your portfolio value may drop below the size of the investment loan.

### 2. Interest rate risk  
If interest rates go up, both the home loan and the investment loan get more expensive to service. Your monthly repayment may increase and you'll need to make additional repayments.

### 3. Behavioural risk  
This strategy assumes discipline. The model assumes you reinvest redraws annually and that you pay every dollar of after-tax investment income into your home loan.

### 4. Tax / structure risk  
You must keep the investment loan purpose clean. The ATO looks at what the borrowed funds are used for. If you mix personal use and investing in the same loan split, you can contaminate deductibility.

This is why debt recycling is usually set up with a broker and tax professional who understands structuring.

---

## Does the ATO Allow Debt Recycling?

Debt recycling is a common strategy.  
Borrowing to invest in income producing assets and claiming the interest is, in principle, allowed under Australian tax law.

Where people get in trouble is:
- incorrect loan structuring,
- claiming deductions on interest for loans that weren't actually used for income producing purposes,
- or mischaracterising lifestyle spending as “investment”.

If you’re thinking about doing this:
- speak to a tax professional or adviser,
- speak to a mortgage broker who has actually implemented this before,
- and make sure each investment redraw is documented.

---

## How to Model Your Own Numbers

Want to see how this could look for you?

Use the free **[Debt Recycling Calculator](/calculators/debt-recycling)**.

It lets you:

- Enter your home value, home loan balance, offset balance and interest rates.
- Set how much you’d initially move from your offset into the loan and redraw on day one.
- Compare Strategy A (no recycling) vs Strategy B (debt recycling).
- See when you could theoretically become completely debt free, allowing for CGT.

You’ll also see:
- your projected net wealth under each strategy,
- the year-by-year loan balances,
- and the **“When will I be debt free?”** chart.

---

## Frequently Asked Questions About Debt Recycling

### Is debt recycling the same as an offset account strategy?
No. An offset account reduces the interest charged on your home loan, which is good, but it doesn’t generate investment income or tax deductions.

Debt recycling deploys some of that cash, converts it into deductible debt, and aims to accelerate wealth building alongside debt reduction. You’re taking on investment risk to (potentially) get ahead faster.

### Do I need to invest only in Australian shares?
No. In reality most people use a diversified mix (Australian shares, international shares, ETFs, managed funds).  
In our calculator we model franking credits explicitly for the Australian share portion, because franking is uniquely valuable in Australia.

### Is this “tax avoidance”?
Claiming interest on money borrowed to invest is standard. Where you get in trouble is if you’re not clear on where the investment loan funds are deployed. The ATO cares about purpose.

### What happens if the market crashes?
Your portfolio value can drop sharply. If that happens in the early years, Strategy B can actually look worse than Strategy A for a while. If that possibility keeps you up at night, you may not be suited to leveraging into shares.

### Can I do debt recycling inside super instead?
Super is taxed differently and contributions are capped. Debt recycling is specifically about turning home loan debt into tax-deductible investment debt in your own name(s), outside super.

---

## Key Takeaways

- Your home loan is non-deductible “bad debt”.  
- Investment debt (used to buy income-producing assets) can be tax-deductible.  
- Debt recycling is about gradually swapping one for the other.
- Franking credits and negative gearing can boost after-tax cash that you can pay straight into your home loan.
- This strategy is not free money. It uses leverage and carries risk.
- You should get professional advice to ensure the strategy is appropriate for your personal circumstances.

Want to see if it might work for you — with your numbers, tax rate, and interest rates?

Run the numbers using the **[Debt Recycling Calculator](/calculators/debt-recycling)**.

---

*Disclaimer: This article provides general information only and does not constitute personal financial, credit, or tax advice. You should seek professional advice before implementing a debt recycling strategy.*


A practical Australian guide to debt recycling — how to convert your home loan into tax-deductible investment debt, accelerate wealth, and aim to become debt-free sooner. Includes franking credits, negative gearing, and a free debt recycling calculator.

#negative gearing

Buying an Investment Property in Australia: From Deposit to Tax Benefits

Debt Recycling in Australia: How It Works, Risks, Tax Benefits, and a Step-by-Step Example