Rental Property Tax Deductions Every Australian Landlord Should Know
With 30 June approaching, it's worth making sure you're claiming everything you're entitled to. The ATO allows landlords to deduct expenses incurred in producing rental income — but only if you know what qualifies and keep the records to prove it.
This guide covers every major deduction category, the rules around each, and the common mistakes that result in landlords either overclaiming (triggering audits) or underclaiming (paying more tax than necessary).
How Rental Property Deductions Work
The ATO applies a simple test: a deduction is allowed if the expense was incurred in earning assessable rental income. If the property was available for rent for the full year, most expenses are fully deductible. If it was rented out for only part of the year (or you used it yourself for part of the year), you must apportion deductions accordingly.
Keep every receipt and record. The ATO can audit rental property claims up to four years after lodgement, and "I think I spent about $400 on repairs" is not a valid record.
Mortgage Interest
The biggest deduction available to most landlords.
If you borrowed money to purchase the investment property, the interest on that loan is fully deductible. Principal repayments are not deductible — only the interest component.
If you have a line of credit or offset account, the calculation can be more complex. Interest on funds used for private purposes (a holiday, renovations to your home) is not deductible even if the loan is secured against the investment property.
Refinancing: The interest on a refinanced loan is deductible to the extent the funds are used for the investment property. Borrowing costs on refinancing (application fees, mortgage registration fees) can be deducted over five years or the term of the loan, whichever is shorter.
Depreciation
Depreciation is the most commonly missed deduction — and the one that can make the biggest difference to your tax position.
There are two types of depreciation for investment properties:
Building Allowance (Division 43)
If your property was constructed after 16 September 1987, you can claim 2.5% of the original construction cost per year. This applies to the structural elements of the building — walls, floors, roof, fixed carpets.
You need to know the original construction cost. If you don't know it (common with older purchases), a quantity surveyor can estimate it. The estimate must be based on the actual construction cost, not the current replacement value.
Plant and Equipment (Division 40)
This covers removable assets: appliances, hot water systems, air conditioning units, blinds, curtains, carpet (non-fixed), dishwashers. Each item depreciates at its own rate under the ATO's effective life schedule.
Important rule change from 9 May 2017: For properties with a contract of sale dated 9 May 2017 or later, second-hand plant and equipment items (those already installed in the property when you purchased it) cannot be depreciated by the new owner. You can only depreciate new items you install yourself.
This change significantly reduced the value of depreciation claims for established properties purchased after that date. It did not affect new properties or the Division 43 building allowance.
Quantity surveyor report: For most investment properties, a professional depreciation schedule from a quantity surveyor costs $500–$700 and typically identifies $3,000–$10,000+ in first-year deductions. For a property in a 37% or 45% tax bracket, the report pays for itself many times over.
Repairs vs Capital Improvements
This distinction trips up landlords more than any other.
Repairs are fully deductible in the year incurred. A repair restores an item to its original condition — fixing a broken window, patching a leaking roof, repairing a broken fence.
Improvements are not immediately deductible — they must be depreciated. An improvement enhances the property beyond its original condition — replacing a timber fence with a colourbond fence, adding a second bathroom, installing a new kitchen.
The grey area is when a repair results in something better than what was there before. Replacing a single broken roof tile is a repair. Replacing the entire roof (even if old age caused the need) may be treated partly as an improvement.
Initial repairs: Work done to fix defects that existed when you purchased the property is not immediately deductible — it's treated as part of the cost of acquiring the property and must be depreciated.
Insurance Premiums
Landlord insurance, building insurance, and contents insurance for the investment property are all fully deductible. Keep the policy documents as evidence of the expense.
Public liability insurance is deductible. Health insurance for the landlord is not.
Council Rates and Water Rates
Both are fully deductible. If water charges are split between supply (a fixed charge) and usage (variable based on consumption), both components are deductible to the extent you as the landlord pay them.
If your lease requires tenants to pay water usage charges above a threshold, only the amounts you actually pay are deductible.
Property Management Fees
If you use a property manager, their fees are fully deductible: management fees, letting fees, lease renewal fees, inspection fees. Keep the agency statements as records.
If you self-manage — which around 25% of Australian landlords do — you can't deduct your own time, but you can deduct the cost of tools and services you use. Our Rent Check tool is free, but if you pay for professional services to assist with management tasks, those costs are deductible.
Advertising for Tenants
Listing fees on realestate.com.au, Domain, or Flatmates.com.au are fully deductible. Print advertising, signboards, and any professional photography for the listing are also deductible.
Travel to the Property
Changed significantly in 2017. Prior to 1 July 2017, landlords could deduct travel to inspect their investment property or attend to repairs. This deduction was removed for all individuals from 1 July 2017.
The only exceptions are:
- Travel by companies or trusts (not individuals)
- Travel by excluded entities (certain residential investment trusts)
If you're an individual landlord, you cannot claim travel costs for inspections, rent collection, or attending to repairs — even if you drive to the property yourself to supervise a tradesperson.
Legal and Professional Expenses
Deductible:
- Costs of evicting a tenant
- Preparation of tenancy agreements (ongoing — not first lease)
- Body corporate fees
- Tax agent fees for preparing the rental property section of your return
- Accounting fees for bookkeeping related to the rental property
Not deductible:
- Legal costs associated with buying or selling the property (these form part of the cost base for CGT purposes)
- Legal costs for disputes unrelated to the rental income (e.g., boundary disputes)
Body Corporate Fees
For strata properties, body corporate (owners corporation) levies are deductible. This includes general administration levies and special levies, subject to the repair vs improvement distinction above.
Administrative fund levies (for ongoing maintenance) are fully deductible. Sinking fund levies (for capital works) are generally not immediately deductible unless the work qualifies as a repair, in which case they may be deductible when the work is actually carried out.
Record Keeping Requirements
The ATO requires you to keep records for five years from the date you lodge the relevant tax return. For depreciation claims, you must keep records for the entire period of ownership plus five years after disposal.
What to keep:
- Loan documents and interest statements
- All receipts for expenses
- Rental income records (statements from your property manager, or your own ledger)
- Depreciation schedule
- Settlement statement from purchase (needed for cost base calculations)
- Insurance policies
Keep digital copies. A shoebox of receipts that gets water damaged proves nothing.
Common Mistakes
1. Claiming personal use periods
If you used the property yourself for any period — even just a weekend — you must apportion deductions for that period. You cannot claim 100% of expenses for a property you used personally for part of the year.
2. Missing depreciation entirely
Many landlords, especially those who self-manage and prepare their own returns, simply don't claim depreciation. A quantity surveyor report is not expensive relative to the deductions it identifies.
3. Claiming the principal repayment
Mortgage principal repayments are not tax deductible. Only the interest component is. If you're not sure what the split is, check your loan statements — your lender must provide this detail.
4. Not splitting expenses for co-owners
If you own the property with another person, you can only claim deductions in proportion to your ownership interest. If you own 50%, you claim 50% of the deductions. You cannot transfer unused deductions to the other owner.
5. Treating improvements as repairs
Replacing something with something better is an improvement, not a repair, even if the old item was fully worn out. The test is the nature of the work, not the condition of what was replaced.
6. Forgetting to include rental income
All rental income is assessable income — including insurance payouts for loss of rent, bond amounts you retain, and payments from government housing schemes.
How Rent Levels Affect Your Tax Position
The amount of rent you charge affects your tax position in two ways: it determines your rental income, and it determines how far your deductions extend.
If your property is negatively geared (deductions exceed income), a higher rent reduces your loss and therefore reduces your tax benefit from negative gearing. If positively geared, higher rent increases your taxable income.
Getting the rent right matters for investment performance, not just tax. Use our yield calculator to model how different rent levels affect gross and net yield, and Rent Check to confirm your rent is aligned with the current market for your suburb.
A Note on Tax Advice
This guide covers general principles based on ATO guidance as at the 2025-26 tax year. Tax law changes frequently, and individual circumstances vary. For anything complex — mixed private and investment use, trust structures, co-ownership arrangements, or properties acquired under unusual conditions — get advice from a registered tax agent or accountant who specialises in investment property.
The ATO's investment property guide (available at ato.gov.au) is also an authoritative reference and is updated each year.