In most cases, you can claim a tax deduction for prepaid interest on an investment property—but only for up to 12 months in advance, not 2 years.

The Australian Tax Office (ATO) allows property investors to claim a deduction for interest paid in advance, but only for up to 12 months. This is known as the 12-month rule. As long as the investment property continues to be used to earn rental income, and the prepaid interest does not extend beyond 12 months into the future, the full interest amount can generally be claimed in the financial year it is paid.

So, if you prepay 12 months of interest (e.g. from July 2025 to June 2026) in June 2025, and your investment property continues to generate rental income, you can generally claim the full prepaid interest as a deduction in the 2024–25 financial year, which is when the payment was made.

However, if you prepay interest for more than 12 months, such as 2 years, the deduction must be apportioned over the relevant income years. That means you won’t be able to claim the full amount upfront. Instead, the ATO will require you to spread the deduction across the 2 years the interest covers.