Investment Property Tax Deductions: What You Can (and Can't) Claim in Australia

🎯 The golden rule behind every claim🔗

Before the list of deductions, it's worth understanding the one principle that decides all of them. You can only claim an expense to the extent it's incurred in producing assessable rental income. Simple to say, and it catches out a lot of investors in practice.

A few situations where deductions get cut down or knocked back entirely:

• Renting to family below market rate. Charge your sister $250 a week when the going rate is $500, and the ATO limits your deductions to the proportion that reflects genuine market rent.
• Mixed personal and investment use. Use the place yourself for three months and rent it for nine, and only 75% of most expenses are deductible. You apportion by time, floor area, or another reasonable method.
• Not genuinely available for rent. A property sitting vacant with no real attempt to find tenants can have deductions denied for that period entirely.

💰 Loan interest, the big one🔗

This is usually the largest deduction by far, and it's worth understanding exactly how it works. Interest on your investment loan is deductible. Principal repayments are not. If your monthly repayment is $3,200 and $1,800 of that is interest, only the $1,800 is claimable.

One trap worth flagging: redraws. Pull $20,000 out of your investment loan for a holiday or a car, and the interest on that portion stops being deductible from that point on. The ATO looks at what the borrowed money was actually used for, not just which loan account it sits in. Keep investment and personal borrowing genuinely separate, ideally in different accounts entirely.

When loan interest pushes a property into an annual loss, that's negative gearing, covered in more detail further down.

🧾 Property management, rates, insurance🔗

The everyday running costs of a rental property are, for the most part, straightforwardly deductible:

• Property management fees (typically 7 to 10% of gross rent), letting fees, advertising, and lease renewal fees, all fully deductible. Self-manage instead, and you can still claim direct costs like platform advertising.
• Council rates are fully deductible for the period the property is rented or genuinely available for rent.
• Water charges you actually pay are deductible. If your lease makes the tenant pay their own water usage, you can't claim it, because you never incurred the cost.
• Landlord and building insurance are fully deductible, as legitimate costs of protecting an income-producing asset.
• Land tax is deductible while the property is rented or available for rent, claimed in the income year the liability relates to. Rates and thresholds vary by state.
• Body corporate levies for admin and sinking funds are deductible. Special levies raised for capital improvements, like a new lift or a resurfaced car park, are not immediately deductible and get spread as capital works instead.

🔧 Repairs vs improvements🔗

🎯 The essential: A repair restores something to its original condition and is deductible now. An improvement makes it better than it was and gets claimed slowly, over decades.

This is where investors make the most expensive mistakes.

Initial repairs are a common trap. Buy a property with existing damage and fix it soon after settlement, and the ATO treats that as capital, not an immediate deduction. Their view is the purchase price already reflected the property's condition, so the repair cost joins the cost base rather than counting as a running expense.

📉 Depreciation, and the second-hand assets trap🔗

Division 40 covers the depreciating assets inside a rental property: dishwashers, carpets, hot water systems, air conditioners, ovens, blinds, and so on.

🎯 The essential: The 2017 Budget rule is still current law. If you bought an existing residential property after 7:30pm AEST on 9 May 2017, you cannot claim depreciation on second-hand plant and equipment that came with it.

This restriction applies to individual investors, not to companies or super funds, and it's easy to misremember as an old rule that's since been reversed. It hasn't been. It remains current ATO policy as of this article. What you can still claim under Division 40:

• Depreciation on brand new assets you buy and install yourself. Buy a new $900 dishwasher, and that's deductible over its effective life.
• Depreciation on all assets in a brand new property, where the 2017 restriction doesn't apply at all.
• Assets costing $300 or less can generally be written off immediately, provided they're not part of a set that together costs more.

For a new build, a quantity surveyor's depreciation report is worth the fee. It documents construction cost and asset values so you claim the full amount you're legally entitled to, no more and no less.

🏗️ Capital works (Division 43)🔗

Division 43 covers the structural elements of a building: walls, roof, floors, driveways, fences, extensions and renovations. These are claimed at 2.5% a year over 40 years for most residential construction completed after 15 September 1987.

If you don't have records of the original construction cost, common with an older property, a quantity surveyor can estimate it for a fee, and that estimate is itself tax deductible.

🚫 What you can't claim🔗

To be clear about the no-go list:

• Principal loan repayments, only the interest portion counts
• Stamp duty and conveyancing costs on purchase, these are capital costs added to the cost base, not immediate deductions
• Expenses during any period you or family use the property personally
• Travel to inspect the property, removed for individual investors from 1 July 2017
• Depreciation on second-hand plant and equipment bought after 9 May 2017
• Borrowing expenses over $100 in full upfront, these get spread over five years or the loan term, whichever is shorter

On that last point: loan establishment fees, title search fees, mortgage broker fees, lender's mortgage insurance and mortgage stamp duty are all deductible, just not all at once if the total is over $100. Pay the loan off early, and you can claim whatever's left in the year you repay it.

⚖️ When deductions beat income🔗

When total deductible expenses for the year exceed rental income, the property is negatively geared. That net loss offsets your other assessable income, usually your salary, and reduces your overall tax bill. Rental income of $24,000 against $38,000 of deductible expenses leaves a $14,000 loss offsetting your salary income.

The flip side is positive gearing: rental income exceeds every deductible expense, and that profit gets added to your taxable income at your marginal rate. Whether negative gearing actually makes sense for you depends on your income, your loan structure and your growth expectations, and it's worth reading the full mechanics in what negative gearing actually means. If you're weighing up buying where you live against buying purely as an investment, rentvesting is worth understanding too, since it changes which of these deductions actually apply to you.

🗂️ Record keeping the ATO expects🔗

Keep records for five years after you lodge the relevant return. For capital works, keep them for as long as you own the property, plus five years after you sell.

• All receipts for repairs, maintenance, insurance and rates
• Loan statements clearly showing the interest and principal split
• Property management statements, monthly and annual
• Depreciation schedule from a quantity surveyor
• Construction cost records for any capital works
• Tenancy agreements and evidence the property was genuinely available to rent

Digital copies are fine. Scanned receipts and electronic records are accepted as long as they're legible and complete.

❓ Frequently asked questions🔗