Rental property deductions are one of the areas the ATO reviews most closely, and one of the easiest places for investors to lose money, either by over-claiming and being caught, or by missing legitimate deductions. The rules aren't complicated once you know the three buckets: what's deductible now, what's deductible over time, and what's never deductible but reduces your capital gain later.
This guide covers each bucket, the repairs versus improvements test, interest, the deductions that were removed in recent years, and the negative gearing changes that start on 1 July 2027. Those changes are law, under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026. The ATO's ruling on rental income and deductions for individuals who aren't in business, TR 2026/1, was finalised in 2026 and is the current guidance.
What can you claim on a rental property?
Every rental expense falls into one of three groups.
| Deductible now (in the year you pay) | Deductible over time | Not deductible (but may go into the cost base) |
|---|---|---|
| Loan interest | Capital works: the building and structural improvements, usually 2.5% a year | Purchase price |
| Council rates, water, land tax | Plant and equipment (new assets only, for most individuals with residential property) | Transfer (stamp) duty |
| Landlord insurance | Borrowing costs: over five years or the loan term if shorter | Conveyancing fees on purchase |
| Property manager fees, letting fees, advertising | Initial repairs to defects that existed when you bought | |
| Repairs and maintenance | Improvements (claimed as capital works, if eligible) | |
| Body corporate admin and sinking fund levies (special levies for capital works are different) | Travel to a residential rental (since 1 July 2017) | |
| Cleaning, gardening, pest control, smoke alarm servicing | Holding costs for vacant land (since 1 July 2019, with exceptions) | |
| Bank fees on the loan, accounting fees for the rental | Costs for periods the property was used privately |
Our deduction checklist agent builds a list of these for each client's property from last year's return and statements, so missing items stand out. Your accountant reviews it before anything is claimed.
What's the difference between a repair and an improvement?
This is the most argued line in rental tax.
- A repair restores something to its original condition: fixing a broken window, replacing some damaged roof tiles, patching a wall, replacing a broken hot water system with a similar one. It's deductible in the year you pay.
- An improvement makes something better than it was, or changes its character: replacing a laminate benchtop with stone, adding a deck, extending a room. It's a capital cost, usually claimed as capital works over 40 years.
- Replacing an entire asset or structure (all the kitchen cabinets, a whole fence, the whole roof) is generally a capital cost, not a repair, even if the old one was broken.
- Initial repairs, fixing damage or defects that existed when you bought the property, aren't deductible, even if you fix them before the first tenant. They're added to the cost base, or claimed as capital works if they qualify.
| Work done | Likely treatment |
|---|---|
| Repainting a room in a similar colour and standard after a tenant leaves | Repair: deductible now |
| Replacing three rotten fence palings | Repair: deductible now |
| Replacing the whole fence | Capital works: 2.5% a year |
| Replacing a broken dishwasher with a similar model | Depreciating asset, not a repair (new asset, depreciated over its life) |
| Fixing storm damage to a gutter | Repair: deductible now (less any insurance received, which is income) |
| Fixing a leaking shower that leaked when you bought | Initial repair: not deductible now |
| Renovating the bathroom with new layout and fittings | Capital works: 2.5% a year |
The ATO's guidance on repairs and maintenance for rental properties has more examples.
Watch out: "Repairs" in the year you buy a property are the classic audit flag. Keep the building inspection report and before-and-after photos, so you can show which work fixed new damage and which fixed old defects.
How do capital works and depreciation work?
Capital works (the building)
For residential property where construction started after 15 September 1987, you can usually deduct 2.5% of the construction cost a year for 40 years. That includes later structural improvements, each with their own 40-year clock. It's based on the original construction cost, not what you paid for the property. If you don't have the builder's figures, a quantity surveyor can estimate them. Older buildings and some construction dates have different rates or none.
Plant and equipment (things inside)
Items like carpets, blinds, ovens, dishwashers and air conditioners are depreciating assets, with deductions over their effective life. But for residential property, individuals (and most trusts and partnerships) can't claim depreciation on second-hand plant that came with a property bought after 7.30 pm on 9 May 2017, or that was previously used in their home. New items you buy and install yourself are still deductible. Our depreciation agent prepares the schedule; your accountant checks the asset classes and dates.
Why the cost base matters later
Capital works deductions you've claimed reduce the property's cost base, so they increase your capital gain when you sell. Deductions now still usually win, because you claim them at your full rate and pay CGT on them later, often at a lower effective rate. But it's not free money.
How does the interest deduction work?
Interest is deductible to the extent the loan was used to buy or improve the rental property, or to pay for its expenses. It doesn't matter what the loan is secured against. What matters is what the money was used for.
- Redraws for private spending make that part of the interest non-deductible. Mixing them into one loan creates an apportionment headache for years.
- Offset accounts reduce interest without changing the loan's purpose. Redrawing from the loan itself changes the purpose.
- Refinancing keeps the deduction for the part of the new loan that replaced the old investment loan.
- Converting your home into a rental doesn't make the old home loan deductible for the private part already used. Loan purpose at the time of borrowing is what counts. Renting out a former home also affects its CGT exemption; see our guide to the main residence exemption.
- Borrowing costs (establishment fees, mortgage insurance, valuation for the lender) are deductible over five years, or the loan term if shorter. If they total $100 or less, they're deductible in full.
Since a loan's purpose decides the deduction, structure your borrowing before you buy, not after. If you're planning to move out of your home and rent it, talk to us before you pay down that loan.
What are the negative gearing changes from 1 July 2027?
Negative gearing is when the property's deductions exceed the rent, and the net loss reduces tax on your other income, such as salary. From 1 July 2027 this is limited for established residential property bought after the 2026 Budget announcement. This is law.
| Property | Negative gearing from 1 July 2027 |
|---|---|
| Held (or under contract) before 7.30 pm AEST, 12 May 2026 | Grandfathered. Losses can offset other income until you sell |
| Established residential property bought after that time and before 1 July 2027 | Losses offset other income until 30 June 2027 only. From 1 July 2027, quarantined |
| Established residential property bought on or after 1 July 2027 | Quarantined from the start |
| Eligible new build (broadly, a new dwelling that adds to housing supply; the exact definition is still being finalised) | Full negative gearing continues for the first owner |
| Commercial property, shares and other investments | Not affected |
Quarantined means the net rental loss can only be deducted against income from residential properties, including capital gains on residential property. Excess losses carry forward to future years. They're not lost, but they're deferred, sometimes for a long time.
The changes apply to individuals, partnerships, companies and most trusts. Super funds (including SMSFs) and widely held trusts are excluded. The detailed definition of a "new residential dwelling" is still being finalised, so borderline cases (knock-down rebuilds, substantial renovations, off-the-plan purchases) need checking before you sign. And the next buyer of a new build doesn't get the concession: for them it's an established property.
Our guide to negative gearing changes covers the details, including how quarantined losses are tracked across several properties.
Worked example: same property, different contract dates
Hypothetical, rounded, 2027–28. Owner earns a salary of $120,000. Assumes the 30% marginal rate bracket is unchanged from 2026–27.
Say a unit earns $26,000 in rent. Expenses are interest $32,000, rates, insurance, strata and agent fees $8,000, and capital works $6,000. Net rental loss: $20,000.
| Bought March 2026 (grandfathered) | Bought August 2026 (established) | Bought August 2026 (eligible new build) | |
|---|---|---|---|
| Net rental loss | $20,000 | $20,000 | $20,000 |
| Can offset salary in 2027–28? | Yes | No | Yes |
| Tax saved in 2027–28 (approx., at 30% + 2% Medicare) | $6,400 | $0 | $6,400 |
| Loss carried forward | $0 | $20,000, usable against future residential property income or gains | $0 |
The August 2026 established unit still gets the deduction eventually, when the property makes a profit or is sold at a gain. But the owner funds the $20,000 shortfall from their pocket each year with no tax relief, which changes the cash flow and the case for buying. Model this before you sign.
How do the 2027 CGT changes affect rental property?
When you sell a rental property, the capital gain is taxed under the CGT changes that are also law from 1 July 2027:
- Growth to 30 June 2027 keeps the 50% CGT discount (if held 12 months or more). The law treats the property as sold and bought back at that date, with the gain deferred until you actually sell.
- Growth after that date gets CPI indexation of the cost base instead, plus a 30% minimum tax on the real gain for resident individuals (people already on 30% or more aren't affected, and recipients of certain income support payments that year are exempt).
- Eligible new builds and qualifying affordable housing keep the choice of the 50% discount (affordable housing keeps its 60% discount).
So for a property you'll hold past 30 June 2027, a market valuation at that date, or reliance on the Government's apportionment method once released, will set how much of your gain gets the discount. Our guide to the CGT discount changes from 1 July 2027 explains the valuation options. Our historical property value agent can give an indicative figure; for anything material we'll suggest a registered valuer.
Mistakes we see on rental schedules
- Initial repairs claimed as repairs in the first year.
- Whole replacements claimed as repairs (a new roof, all-new kitchen, the whole fence).
- Interest on redraws used for a car, a holiday or school fees.
- Depreciation on second-hand plant in a residential property bought after May 2017.
- Holiday homes with the owner's own weeks, or weeks blocked for family, included as "available for rent".
- Joint owners splitting deductions unequally. For co-owned investment property (not a business), income and deductions follow legal ownership, usually 50/50, regardless of who paid.
- Insurance payouts not declared as income when the repair was deducted.
- No contract date on file for each property, which now decides the negative gearing treatment.
- Claiming travel to inspect a residential rental.
What to send us at tax time
- Agent's annual statement (and monthly statements if the property changed hands)
- Loan statements for the full year, plus details of any redraws
- Receipts for repairs, with notes on what was done and why
- Council rates, water, land tax and insurance notices
- Body corporate levy notices, showing admin, sinking fund and any special levies
- Depreciation schedule, or the builder's construction costs
- Purchase or sale contracts for any property bought or sold, with contract dates
- Dates the property was vacant, and evidence it was advertised
How BPAG helps property investors
Most of our individual clients have at least one investment property. Our individual tax returns service prepares the rental schedule with the checks above, and our work with property investors goes further: structure, loans, land tax across states, and planning for the 2027 changes.
- The schedule. We prepare it from your statements and receipts, sort repairs from capital, and keep a running capital works and cost base register so the sale is easy later.
- Before you buy. We model the after-tax cash flow, including whether negative gearing applies, which name or entity should own the property, and the land tax. Our state taxes service covers duty and land tax.
- Before you sell. We work out the gain, the discount and indexation split, and the timing.
The AI agents draft. A qualified accountant reviews and signs off every schedule and every piece of advice, and nothing goes to you or the ATO without a person approving it. If you want advice on borrowing or on buying property inside super, that's for a licensed financial adviser; we work alongside them, and our SMSF property guide explains the rules.
Frequently asked questions
Can I claim the cost of travelling to inspect my rental property?
Not for a residential rental, if you're an individual. Travel to inspect, maintain or collect rent from a residential rental property hasn't been deductible since 1 July 2017, unless you're carrying on a business of letting property or you invest through an entity like a company. Commercial property rules are different.
Is stamp duty on an investment property tax deductible?
No. Transfer duty on buying a property isn't deductible. It forms part of the property's cost base, which reduces your capital gain when you sell.
Can I claim deductions if my property is rented to family at a discount?
Only up to the amount of rent you receive, if the rent is below market. The ATO treats below-market rent to relatives or friends as not fully commercial, so you can't create a loss from it. Charge market rent and keep evidence of how you set it.
What if my property was vacant for part of the year?
You can still claim expenses for periods it was genuinely available for rent: advertised at a market rate, with reasonable conditions, and not used by you or your friends. If it was blocked out for private use, or priced so nobody would rent it, the expenses for those periods aren't deductible.
Do I need a quantity surveyor's depreciation report?
For capital works on a property built after 1987, a report from a quantity surveyor is usually the most reliable way to work out the construction cost if you don't have the builder's records. The fee is deductible. For older properties, or second-hand residential properties where you can't claim plant, it may not be worth it.
Can I prepay interest before 30 June to bring the deduction forward?
Generally yes, for an individual investor, if the prepayment covers a period of 12 months or less that ends before the end of the next income year. It brings the deduction into this year. Check the lender's terms and whether it suits your cash flow first, and think about which year your tax rate is higher.
Official sources
General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.