Should You Keep More Debt On Properties With The Biggest CGT Bill?

You can intentionally keep more debt on properties with the highest capital gains tax (CGT) exposure—but only if the structure still works on pre‑tax cashflow, risk and your likely exit plan.

The ATO doesn’t give a bonus just because a property has a big latent gain. What matters is loan purpose, interest deductibility, your marginal tax rate and when you’re likely to sell. With the 2027 CGT and negative gearing reforms, the old “maximise deductible interest at all costs” play is getting weaker.

This guide shows how to decide—this week—whether keeping more debt on your CGT‑heavy properties is smart optimisation or dangerous over‑engineering.

1. The core idea: why people keep debt on CGT‑heavy properties

1.1 What this strategy is really trying to do

When investors say “I want to keep debt on the property with the biggest capital gain”, they’re usually chasing three things:

1. Maximise deductible interest on properties clearly used to earn income.
2. Minimise non‑deductible home debt, by pushing as much debt as possible away from the main residence.
3. Align debt with future sales, so that when they eventually sell a high‑CGT property, they can use sale proceeds to clear associated investment loans and crystallise the gain on their terms.

Under current rules, interest on loans used to buy or improve an income‑producing property is generally deductible (ATO TR 2004/4). So, on paper, it seems logical to:

• Keep your home as debt‑free as possible (non‑deductible interest), and
• Keep investment loans high where you can claim interest.

This overlaps with debt recycling strategies, covered in more detail in /insights/beginners-guide-debt-recycling-home-loan-investment-portfolio and /insights/beginners-guide-debt-recycling-australian-homeowners.

1.2 Why CGT exposure enters the picture

CGT exposure is simply:

The likely taxable capital gain you’d trigger if you sold a property, after applying the main residence rules and any discounts.

Investors often want to:

• Load more debt onto properties that are fully taxable for CGT (pure investments), and
• Clear debt faster on properties with lower or no CGT (main residence, or something that may qualify for the main residence exemption or six‑year rule).

The logic:

• Deductible interest now reduces taxable income, offsetting some of the future CGT bill on that property.
• Debt on a main residence isn’t deductible, so paying it down first feels like a win.

The problem is that CGT is driven by sale price minus cost base, not by how you allocate your loans. Debt doesn’t directly change the gain—it changes cashflow and tax along the way, and often who can afford to hold for longer.

2. The new 2027 rules: why this decision is changing

2.1 Snapshot of reforms that matter for this decision

Based on the 2026 Reform Bill and Budget measures:

• The 50% CGT discount for individuals and trusts is set to be replaced by CPI indexation plus a 30% minimum CGT tax on most gains.
• Pre‑CGT assets are gradually being pulled into the tax net via deemed disposals and new categories of gains.
• Negative gearing is being tightened for established residential properties purchased after 12 May 2026, with many rental losses quarantined.

Commercial property and some larger or institutional structures are largely outside these negative gearing changes, but not the broader CGT reforms.

The key implications for your debt‑allocation question:

1. Interest deductions are less powerful when losses can’t easily offset wage income.
2. The after‑tax value of capital growth changes; holding long term isn’t quite as tax‑advantaged as under the 50% discount.
3. The order you sell properties in, and how much debt they carry, can move you between CGT brackets and timing options.

For a deeper dive into the reform mechanics, see /insights/will-tighter-negative-gearing-rules-kill-property-investing-reality-check and /insights/tax-cgt-when-selling-down-geared-properties.

2.2 Why “maximise deductible interest” is no longer enough

Under the old rules, the playbook was often:

• Keep the home loan high, recycle to investment, negatively gear hard.
• Rely on CGT discount + wage offset to smooth it all out.

Under the 2027 settings and higher interest rates (RBA cash rate around 4.35% in mid‑2026):

• Pre‑tax cashflow matters more. You need properties that work without assuming big tax subsidies. (See knowledge fact 2.)
• Interest costs are structurally higher due to persistent inflation pressures and energy shocks.
• CGT on exit is tougher, so more of your “win” is taxed.

So intentionally keeping heavy debt on a high‑CGT property only makes sense if it passes a pre‑tax test and helps your whole‑of‑portfolio outcome, not just one property’s tax line.

3. Foundations: how CGT and loan deductibility really interact

3.1 Loan purpose vs securing property

A critical principle (see fact 1 and 19):

The purpose of the borrowing, not which property secures it, determines whether interest is deductible.

That means:

• A loan secured by your home can still be investment debt if the borrowed funds were used for a deposit on an investment property.
• A loan secured by an investment property can be partly non‑deductible if you redrew for a private car or holiday.

For your strategy, this means you’re often:

• Restructuring loan splits (without necessarily changing the total debt) so that
• More of the debt with a clean investment purpose sits against properties that will be fully taxable for CGT.

3.2 CGT is about gains, not debt

Your CGT calculation is broadly:

Capital proceeds − cost base = capital gain (or loss)

Where cost base includes:

• Purchase price
• Acquisition costs (stamp duty, legal, buyers’ agent, etc.)
• Some holding and improvement costs (depending on use and rules)

Loan repayments and interest don’t form part of the cost base (except in limited non‑deductible interest cases on vacant land etc.). So changing your loan allocation does not directly reduce CGT.

What it does change is:

• Your annual taxable income (through deductible interest)
• Your capacity to hold or be forced to sell under pressure
• The size of the loan you can clear when you do sell

That’s where the strategy can help—or hurt.

3.3 Main residence rules and the six‑year rule

Your main residence is generally exempt from CGT, but:

• You can only have one main residence at a time (with limited overlap).
• If you move out and rent it, the six‑year rule may allow you to treat it as your main residence for CGT while rented, if you don’t claim another property as main residence.

This is central to the question:

• If a property might be covered by the main residence exemption now or in future, the CGT exposure may be low or nil.
• That can tilt the case toward reducing debt on that property (because there’s no CGT, but debt is non‑deductible if you live in it), and
• Keeping more debt on properties where CGT will almost certainly apply.

The sibling article on six‑year rule and main residence exemption will cover that interaction in depth; here, we’re focused on the debt side.

4. A simple framework: four factors to check before loading debt onto a CGT‑heavy property

Before you chase this strategy, run through four lenses:

1. Tax profile: How will this property be taxed over its life?
2. Cashflow robustness: Does it work on pre‑tax numbers?
3. Risk and buffers: Can you survive rate and vacancy shocks with this loan allocation?
4. Exit and succession: When and how are you likely to sell or transfer it?

4.1 Tax profile mapping (do this for each property)

For each property, sketch:

• Current use: home / IP / mixed
• Likely future use (5–10 years)
• Main residence exemption likelihood (full, partial, nil)
• Expected holding period
• Expected nominal growth and current unrealised gain
• Impact of 2027 CGT reforms (e.g. will gains be taxed under new rules?)

Properties with the highest CGT exposure tend to be:

• Long‑held investments with large unrealised gains
• Properties that have never been your main residence
• Post‑2027 acquisitions under the new minimum 30% CGT tax

Those are the ones where investors often consider deliberately keeping more debt.

4.2 Cashflow robustness: pre‑tax test first

Borrowing to own property must make sense before tax. This is a core principle from [/insights/self-employed-business-owners-high-income-professionals-negative-gearing-cgt-strategy] and the gearing basics in /insights/beginner-gearing-rules-lvr-caps-buffers-property-choices.

Run a pre‑tax cashflow for each property, assuming:

• Current interest rate + a 2–3% shock (knowledge fact 6)
• Realistic rent and vacancy assumptions
• Repairs, strata, insurance, and rising costs (construction and energy input costs per ABS PPIs)

If the property fails badly on pre‑tax numbers under these shocks, loading extra debt onto it just to chase deductions increases risk.

4.3 Risk, LVRs and buffers

Check:

• Loan‑to‑value ratio (LVR) on each property
• Total portfolio repayments as a % of net income (stay under ~35% as a practical speed limit—fact 13)
• Cash/offset buffers (build at least 3–6 months of living costs and all loan repayments before adding gearing—facts 9 and 12)

Higher debt on a CGT‑heavy property is only sensible if:

• The LVR is still in a safe band (e.g. 60–80%, depending on your situation)
• You maintain your buffers, even after restructuring

4.4 Exit and succession

Map your likely order of sale over the next 10–15 years:

• Which property are you most likely to sell first if rates bite or circumstances change?
• Which are “never sell” or “retirement keepers”?

A common pattern:

• Sell underperforming or non‑core assets first.
• Hold blue‑chip, well‑located properties as long as possible.

If your CGT‑heavy property is also a “never sell” asset, over‑loading it with debt for deductions may trap you in high repayments indefinitely.

If it’s a likely sale within 5–10 years, higher deductible interest now might make sense—provided you can comfortably clear the loan from sale proceeds.

See /insights/refinancing-underperforming-investment-properties-hold-renovate-or-sell for a method to classify underperformers.