Principal is the amount of money borrowed and still owed, separate from the interest charged on it.
Principal is the amount of money borrowed and still owed, separate from the interest charged on it.
Only the interest is tax-deductible against rental income. Principal repayments are not.
This creates a gap between your cash position and your tax position. A property can be cashflow negative — you are paying out more than you receive — while showing a taxable profit, because principal repayments are cash out but not a deduction.
Paying down principal is not an expense, it is converting cash into equity. It reduces your net worth not at all; it moves it from one place to another.
Which loan you pay down matters. Where you have both deductible investment debt and non-deductible personal debt, paying down the non-deductible debt first is generally more efficient. Get advice before restructuring, because how debt is repaid and re-drawn affects deductibility.
Last reviewed: 1 August 2026 · General information only, not financial advice.
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