Interest on Loan? Unlock Hidden Tax Benefits (2026)

Navigating the intricacies of tax laws can be daunting, especially when it comes to understanding whether you can deduct interest on a loan from your capital gains. For many Australians, this question is pivotal when planning their financial future, particularly in a property investment context. Understanding the nuances could mean significant savings and smarter financial planning.

Understanding Interest on Loan and Capital Gains

In Australia, capital gains tax (CGT) is a crucial component of the tax system. It's the tax you pay on the profit you make when you sell an asset like property, shares, or other investments. However, there's often confusion about whether the interest on loans, particularly those taken out for investment purposes, can be deducted from these capital gains.

The short answer is that interest expenses can indeed be deductible—but primarily against the income generated by the investment rather than directly against capital gains. This distinction is vital for anyone looking to optimise their tax position.

Current Rates, Requirements, and Options

As of 2026, Australian interest rates for investment loans generally range from 6.49% to 12%, depending on the lender and the borrower's credit profile. When considering deductions, it's essential to understand the specific requirements and options available.

Interest can be deducted when:

• The loan was used to acquire an income-producing asset.
• The asset generates assessable income.
• The borrower can substantiate the expense with documentation.

However, if you're considering using loan interest to offset capital gains directly, you may face limitations. This is where a comprehensive understanding of the Australian Taxation Office (ATO) guidelines is vital.

Steps to Deduct Loan Interest from Income

To ensure you're optimising your deductions, follow these steps:

1. Identify Eligible Loans: Ensure the loan was used to acquire an asset that produces income.
2. Maintain Proper Documentation: Keep records of interest payments and the income generated by the asset.
3. Consult with a Tax Professional: An expert can provide personalised advice and ensure compliance with ATO rules.
4. File Your Tax Return Correctly: Include your deductions accurately under the appropriate sections.
5. Review Annually: Regularly review your financial situation and any changes in tax laws that may affect your deductions.

Tips and Considerations

Here are some expert tips to consider when dealing with loan interest deductions:

• Understand the Rules: The ATO guidelines can be complex. Make sure you understand what qualifies as a deductible expense.
• Interest-Only Loans: Consider interest-only loans for investment properties to maximise your deductible interest.
• Use Esteb and Co’s Expertise: With access to over 83 lenders, Esteb and Co can help you find the best loan product for your needs.
• Monitor Interest Rates: Rate fluctuations can affect your repayment strategy and tax deductions.
• Plan for the Long-Term: Consider how your investment strategy aligns with your overall financial goals.

Frequently Asked Questions

• Can I deduct loan interest from my capital gains tax? No, interest is typically deductible against income, not directly against capital gains.
• What documents do I need for claiming deductions? You need records of the loan agreement, interest payments, and income generated by the asset.
• How does an offset account affect my deductions? An offset account can reduce your interest payments, affecting the total deductible amount.
• Are there any changes expected in the tax laws? Tax laws can change, so it's essential to stay updated or consult with a professional.
• Can Esteb and Co assist with finding the right loan? Absolutely, our access to 83+ lenders ensures we can find a loan that fits your financial strategy.