Last reviewed October 2026
General information only. It isn’t personal advice. Consider speaking with a licensed adviser and registered tax agent about your situation.
Debt recycling with an investment property works, but the investment property loan isn’t the debt that gets recycled. The interest on that loan is generally already tax-deductible. What you recycle is your home loan, by paying it down and borrowing the same amount back through a separate loan account (a loan split) to invest. Since the 2026 Federal Budget, what you invest that money in matters more than it used to, because rental losses on an established property bought after 12 May 2026 can no longer reduce the tax on your salary from 1 July 2027.
If debt recycling is new to you, our guide to debt recycling covers how the strategy works, what makes the interest deductible, and the costs and risks of borrowing to invest, including what happens to the debt if markets fall.
Can you debt recycle an investment property loan?
No, because there’s nothing to recycle. Debt recycling exists to turn debt with non-deductible interest into debt with deductible interest. If the money from your investment property loan was used to buy the rental, the interest on it is already deductible against the rent, and the ATO’s rules on rental interest confirm it’s what the money was used for that counts, not which property the loan is secured against.
What an investment property owner can recycle is the home loan. The mechanics are exactly the same as for anyone else. You pay spare cash off the home loan, draw the same amount from a separate investment split, and invest it in something that earns assessable income.
How should the home loan and the investment loan work together?
For most people holding both, the home loan is the one to pay down first. Every dollar of principal paid off the investment loan reduces interest you could have claimed, while every dollar paid off the home loan reduces interest you can’t. On the 47% top rate (including the 2% Medicare levy), $1,000 of interest on the home loan costs you $1,000, while $1,000 of interest on a loan for a property you held before Budget night, or a new build, costs you $530 after the deduction.
That’s why a common approach is to switch the investment loan to interest-only and point the repayment you were making at the home loan instead. Our post on interest-only investment loans works through that move, including the rate premium and what happens when the interest-only period ends. Debt recycling then sits on top, recycling the home loan as it comes down.
Three set-up rules matter more when you have both loans.
- Keep the loans on separate accounts, and keep any offset account (a transaction account that reduces a loan’s interest) linked to the home loan, so spare cash reduces the interest you can’t claim
- Never redraw from the investment property loan for anything private, because the ATO then splits the interest between private and investment use for the life of the loan
- Be careful with one loan secured against both properties (cross-collateralisation), which makes it harder to sell or refinance one property without involving the other
Can you use debt recycling to buy an investment property?
You can. Money paid off the home loan and drawn from a separate split to pay the deposit and costs on a rental is borrowed for an income-producing purpose, so the interest on it is generally deductible. But since the 2026-27 Budget, whether those deductions can reduce the tax on your salary depends on what you buy and when.
Negative gearing is when a rental property’s costs are more than its rent and the loss is deducted against your other income, like your salary. Under the changes to negative gearing passed into law in June 2026, an established residential property bought after 7:30pm (AEST) on 12 May 2026 is treated differently from 1 July 2027. Any loss on it (the rent less the interest and other costs) can only be used against income from residential property, and can’t reduce the tax on your wages. The unused loss is carried forward to future years, to be used against residential property income or a capital gain on residential property. The Budget’s tax reform summary sets out the change, and our post on the negative gearing changes covers who’s caught.
Two groups are outside it. Properties held before Budget night keep the old rules, and new builds can still be negatively geared against other income.
To give you an example, say a rental earns $36,000 a year in rent, and the interest, rates, insurance and other costs come to $51,000. That’s a $15,000 loss.
- Bought before Budget night, the $15,000 loss reduces your taxable income, which on the 47% rate is $7,050 back each year
- Bought after Budget night, from 1 July 2027 the $15,000 can’t reduce the tax on your salary. It’s carried forward and used later against residential property income or a capital gain, so the tax benefit is delayed, possibly by many years, rather than gone
So the same $15,000 loss costs you $7,950 a year after tax on the first property, and the full $15,000 on the second until the carried-forward loss can be used. For someone relying on the yearly refund to cover the shortfall, that’s $7,050 a year less in their pocket in the meantime.
So should you recycle into shares or property?
Shares weren’t touched by the negative gearing change. Interest on money borrowed to buy shares can still be deducted against your salary, so the deduction side of recycling into a diversified share portfolio works as it did before the Budget. The capital gains tax change from 1 July 2027 applies to shares like any other investment, which our guide to debt recycling works through. Borrowing against a new build, or against a property you already owned before Budget night, also keeps the old treatment.
For an established property bought now, the recycled money still works, but the tax benefit is delayed until the property makes a profit or is sold. That shifts the question towards whether the property stands up on its own numbers, meaning the rent, the growth and how long you could carry the shortfall without the refund. Our guide to investment property and negative gearing covers how to run those numbers.
There are lots of ways to be right here, and plenty of investors will still buy established property for the growth. The point is to decide with the after-tax cash flow in front of you, rather than the old negative gearing rules most people still have in their heads.
What are the common mistakes with two loans?
These are the most common mistakes when a home loan and an investment property loan sit side by side.
- Paying principal and interest on the investment loan while the home loan still has years to run, which shrinks the debt you can claim before the debt you can’t
- Redrawing from the investment loan to pay for a car, a renovation on the home or a holiday, which mixes the loan for good
- Keeping savings in an offset account against the investment loan instead of the home loan
- Recycling into an established property bought after 12 May 2026 and counting on a yearly tax refund that from 1 July 2027 is delayed instead
- Setting up the splits without the registered tax agent seeing the structure first
Frequently asked questions
Can you debt recycle with an investment property?
Yes, but you recycle your home loan, not the investment property loan, because the interest on the investment loan is generally already deductible. You pay down the home loan and draw the same amount from a separate investment split to invest, which can include a deposit on another rental.
Should I pay off my home loan or my investment loan first?
For most people holding both, the home loan comes first, because its interest isn’t deductible and the investment loan’s interest is. A common approach is to put the investment loan on interest-only and direct the extra repayment at the home loan or its offset account.
Can I use equity in my home for an investment property deposit and claim the interest?
Generally yes, as long as the money is drawn from a separate loan split and used for the property. The ATO looks at what the borrowed money was used for, not the property it’s secured against. For an established property bought after 12 May 2026, any rental loss from 1 July 2027 is carried forward and can only be used against residential property income or a capital gain on residential property.
Does negative gearing still work with debt recycling?
On shares, yes, with no change. On a new build or a property bought before 7:30pm on 12 May 2026, the old rules still apply. On an established property bought after that date, the loss from 1 July 2027 is carried forward against future residential property income or gains rather than reducing the tax on your salary.
How Pivot Wealth helps
We look at how your home loan and investment loan work together, model debt recycling into shares or property against simply paying down the home loan, and lay out the after-tax numbers for each. Pivot Lending sets up the loan structure, and we work alongside your registered tax agent. If you’d like to talk it through, you can book a 10-minute chat.
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Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.