Investment property tax deductions and depreciation

Deductions on a residential rental property fall into three categories: expenses claimed in full in the year they are incurred, expenses spread over a number of years, and capital costs written off over decades. Most disputes with the Australian Taxation Office about rental properties arise from putting an expense in the wrong category rather than from claiming something that is not deductible at all.

Two further sets of rules sit over the top. Restrictions introduced in 2017 removed deductions for second-hand depreciating assets and for travel to residential rental properties. Changes legislated in 2026 will, from 1 July 2027, limit the use of rental losses for many established properties. Both are covered below.

Expenses claimed immediately

The following are generally deductible in the income year they are incurred, to the extent the property is rented or genuinely available for rent:

• interest on the loan used to acquire the property, subject to the apportionment rules described below;
• council rates, water rates and charges, and land tax;
• body corporate or owners corporation administrative fund levies;
• building, landlord and public liability insurance;
• property management fees and letting fees;
• advertising for tenants;
• repairs and maintenance, as distinct from improvements;
• pest control, cleaning, gardening and lawn mowing;
• legal expenses relating to tenancy matters, such as evicting a non-paying tenant;
• bank charges on the loan account, and the cost of preparing a lease;
• quantity surveyor fees for preparing a depreciation schedule, and the cost of managing tax affairs.

Two items on that list are frequently misclassified. Levies paid to a special purpose or sinking fund for capital works are generally not immediately deductible, even though administrative fund levies are. And legal expenses relating to the purchase or sale of the property are capital in nature and form part of the cost base rather than being deductible.

Repairs, improvements and initial repairs

This distinction produces more adjustments than any other.

• A repair restores something to its previous condition without changing its character. Replacing a few broken roof tiles is a repair, and is deductible immediately.
• An improvement makes something better than it was, or replaces an entire asset. Replacing the whole roof, or replacing a worn kitchen with a better one, is an improvement. It is capital, and is claimed as capital works or as a depreciating asset over time.
• An initial repair is work to remedy a defect that existed when the property was acquired, even if the work is done later. It is capital, not deductible as a repair, regardless of how much it looks like one.

The initial repair rule catches many investors who buy a property in poor condition, repair it, and assume the cost is deductible because the property is rented. It is not: the condition existed at acquisition, and the cost is capital.

Expenses spread over several years

Borrowing expenses are the costs of taking out the loan, such as loan establishment fees, title search fees charged by the lender, mortgage broker fees, valuation fees required for the loan, mortgage registration and lenders mortgage insurance. The ATO's position is that where the total exceeds $100, the deduction is spread over the life of the loan or five years, whichever is less. Where the total is $100 or less, it is fully deductible in the year incurred.

Two points follow. Lenders mortgage insurance is a borrowing expense rather than a purchase cost, so it is deductible over five years rather than added to the cost base. And where a loan is repaid or refinanced early, any undeducted balance of borrowing expenses can generally be claimed in that year.

Capital works: the building itself

Capital works deductions, under Division 43 of the tax law, cover the structure of the building and permanent fixtures: walls, floors, roof, windows, doors, built-in cupboards, driveways, retaining walls and similar items.

For residential rental property where construction commenced after 15 September 1987, the deduction is generally 2.5 per cent of the construction cost each year for 40 years from completion. The deduction is based on the original construction cost, not the purchase price, and not on what the building would cost to build today.

Structural improvements made by the current owner also qualify, with their own 40 year period running from when that work was completed. A property built in 1995 and extended in 2018 therefore has two separate capital works entitlements running on different timetables.

Where the construction cost is unknown, which is usual for a property bought second hand, a quantity surveyor may estimate it. The ATO accepts estimates from appropriately qualified professionals, and the cost of obtaining the report is itself deductible.

Capital works deductions claimed reduce the cost base of the property for capital gains tax purposes, so part of the benefit is recovered on sale. This does not make them worthless, because a deduction today is worth more than the same amount of cost base in fifteen years, but it does mean the benefit is smaller than the headline figure suggests.

Depreciating assets: plant and equipment

Depreciating assets, under Division 40, are items that are separately identifiable and not part of the structure: ovens, cooktops, dishwashers, hot water systems, air conditioners, carpets, blinds, light fittings, smoke alarms and similar items.

Each has an effective life, which determines the rate at which it is written off. Assets costing $300 or less may generally be deducted immediately where the conditions are met, and low cost assets may be allocated to a low-value pool and written off at a pooled rate.

The critical restriction applies to second-hand assets. The ATO states that a deduction cannot be claimed for the decline in value of certain second-hand depreciating assets acquired, or contracted to be acquired, at or after 7:30pm AEST on 9 May 2017 for a residential rental property, unless the taxpayer is carrying on a business of letting rental properties. Exceptions apply, including where the property or the asset was acquired before that time.

In practice this means that an investor buying an established home after May 2017 cannot depreciate the existing oven, carpets or air conditioner. They can depreciate assets they purchase and install themselves, and they retain the full capital works entitlement for the building. It is the single largest reason depreciation benefits are greater on new property than on established property, and a significant part of the case for buying new that investors should understand rather than assume.

Travel expenses

The ATO states that travel expenses relating to a residential rental property are generally not deductible. This covers travel to inspect the property, to collect rent or to carry out maintenance. A deduction may be available where the property is used in carrying on a business, including a business of letting rental properties, which is a specific status and not simply a consequence of owning several properties. The restriction does not prevent an investor from claiming the fees charged by a property manager who performs those tasks.

Apportionment

Deductions must be apportioned where the property is not wholly income producing.

• Part-year rental. Where a property is rented for part of the year and used privately for the rest, expenses are apportioned on a time basis.
• Part of the property. Where only part is rented, expenses are apportioned by floor area or another reasonable measure.
• Available for rent. A property must be genuinely available for rent, advertised in a way likely to attract tenants and offered at a realistic rent. A holiday home listed at an unrealistic rent, or restricted so that tenants are unlikely, does not qualify for the periods it is not genuinely available.
• Mixed purpose loans. Interest is deductible according to the use of the borrowed funds, not according to which property secures the loan. Where a loan is used partly for the rental property and partly for a private purpose, interest must be apportioned for the life of the loan. Redrawing from an investment loan for private spending creates this problem permanently, which is the practical reason to keep any equity release as a separate split, as the comparison of offset accounts and redraw facilities explains.

The change to rental losses from 1 July 2027

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026 and changes how rental losses may be used.

From 1 July 2027, losses relating to established residential investment properties purchased after 7:30pm AEST on 12 May 2026 will be deductible only against other income from residential properties, including capital gains, rather than against salary and wages. Excess losses may be carried forward to offset residential property income in future years. The Budget papers state that the measure applies to individuals, partnerships, companies and most trusts, and that widely held trusts and superannuation funds, including self managed superannuation funds, are excluded.

The transitional position is specific. Properties held at the time of announcement, including where a contract had been entered into but not yet settled, are exempt and may continue to be negatively geared. Properties purchased between the announcement and 30 June 2027 may be negatively geared during that period but not from 1 July 2027. Properties purchased from 1 July 2027 cannot be negatively geared unless they are new builds.

New builds remain able to be negatively geared. The Budget defines a new build as a dwelling constructed on vacant land, or one where an existing property is demolished and replaced with a greater number of dwellings. Knock-down rebuilds and substantial renovations that do not increase supply are excluded, and a new build cannot have been previously sold unless it was first owned by the builder and not occupied for more than 12 months. Subsequent purchasers cannot access negative gearing or the 50 per cent capital gains tax discount for that property.

None of this changes what is deductible. It changes what a net rental loss may be offset against. The guides to negative gearing worked examples and rentvesting consider the consequences, and the investment property calculator models cash flow before and after tax.

Capital gains tax on sale

Costs that are not deductible are usually not lost; they form part of the cost base and reduce the eventual capital gain. Transfer duty on the purchase, legal costs of acquisition and sale, agent commission on sale and capital improvements all generally form part of the cost base.

The rules for calculating the gain are also changing. From 1 July 2027 the 50 per cent discount for individuals, trusts and partnerships is replaced by cost base indexation using the Consumer Price Index, together with a minimum tax rate of 30 per cent on real capital gains accruing from that date. For assets owned before 1 July 2027 and sold afterwards, the 50 per cent discount applies to the gain up to the asset's value at 1 July 2027 and the new arrangements apply to gains after it. Recipients of means tested income support such as the Age Pension or JobSeeker are exempted from the minimum tax in a year in which they realise a gain.

Records to keep

Rental property claims are a persistent ATO focus area, and the burden of proof sits with the taxpayer.

• The contract of sale, settlement statement and all purchase costs, retained for the life of the ownership and beyond, for the cost base.
• Loan documents and annual interest statements, and records establishing what borrowed funds were used for.
• A depreciation schedule prepared by a quantity surveyor, obtained early so that deductions are not missed in the first years.
• Invoices for all repairs and improvements, with enough description to establish which is which.
• Agent statements, rates and levy notices, and insurance policies.
• Evidence that the property was genuinely available for rent during any vacant period.
• Records of any private use.

This article is general information and does not constitute tax advice. The rules summarised here are complex, several are changing, and the outcome depends on individual circumstances. A registered tax agent should be engaged for any particular property. Further general background is available in the investment property section, and investors comparing finance structures may request a free assessment from an accredited broker.