Rental property tax basics

Capital works deduction

Generally 2.5% a year over 40 years or 4% over 25 years (current ATO guidance)

Immediate deduction for assets

Depreciating assets costing $300 or less (current ATO guidance)

Negative gearing change

Limited to new builds from 1 July 2027 (law); properties held at 7:30pm AEST 12 May 2026 exempt

Rental records

Keep for 5 years (longer in some cases, such as losses)

Rental income you must declare

The ATO requires owners to include every amount earned from renting, leasing or licensing a property, including properties overseas. This covers long-term leases, short stays and sharing platforms, renting out part or all of your home, and arrangements with family or friends.

Rental income is broader than the weekly rent. The ATO lists related payments that also count, such as:

• bond you keep instead of rent or to cover damage
• booking or letting fees you keep when a guest or tenant cancels
• insurance payouts for lost rent or for damage, and disaster relief payments
• amounts a tenant pays you to cover a repair you can deduct
• government rebates for buying a depreciating asset, such as a solar hot water system

Rent is declared in the income year your tenant pays it. If a property manager collects the rent, the timing is when the tenant pays the manager, not when the money reaches your account, and you report the gross rent before fees and expenses are taken out.

Co-owners split income and expenses according to their legal ownership. If you own 50% of the property, 50% of the rent and 50% of the deductions go in your return.

Renting to family or friends below market rate is treated differently. The ATO expects expenses to be apportioned for the private element and accepts limiting deductions to the rent received, so the property shows no tax loss. Where the money is really a contribution to household costs rather than rent under a lease or licence, it is not income and nothing is deductible.

Expenses you can claim in the year you pay them

While a property is rented, or genuinely available for rent on commercial terms, the ATO allows an immediate deduction for day-to-day running costs. You must actually bear the cost yourself and keep records to prove it. Common examples include:

• loan interest (see the next section)
• council rates, water charges and land tax
• regular body corporate administrative fund and sinking fund levies
• building, contents, public liability and landlord (loss of rent) insurance
• property manager fees and commission, and advertising for tenants
• repairs and maintenance, cleaning, gardening, lawn mowing and pest control
• certain legal costs, such as evicting a tenant who has not paid or recovering unpaid rent

Costs claimed over time or not at all

• Borrowing costs such as loan establishment fees, lenders mortgage insurance, broker fees and mortgage stamp duty are spread over 5 years or the loan term if shorter, unless the total is $100 or less.
• Special body corporate levies for a capital improvement are not deductible as a levy, although the completed work may qualify for capital works deductions.
• Travel to inspect, maintain or collect rent from a residential rental has not been deductible since 1 July 2017, unless you are in the business of letting properties or are an excluded entity.
• Purchase costs such as transfer stamp duty and conveyancing fees are capital costs. They are not deductible but generally form part of the property's cost base for capital gains tax.

If the property is also a holiday home, the ATO denies deductions for ownership costs such as interest, rates and insurance unless the property is used or held mainly to earn rent.

Interest on the investment loan

According to the ATO, interest is deductible on money borrowed to buy the rental property, to buy depreciating assets for it, to pay for deductible repairs, and to fund renovations or extensions. Interest prepaid up to 12 months in advance can also be claimed.

What matters is how the borrowed money is used, not which property secures the loan. Interest on a loan used to buy your own home is not deductible even if the rental property is the security, and the private part of any loan (for example, to buy a car) must be stripped out. Redrawing from an investment loan for personal spending creates the same problem, and the ATO expects the private and rental portions to be tracked for the life of the loan.

Extra principal repayments are not deductible. Interest is also not deductible for any period the property is used privately, even briefly.

Depreciation and capital works

Some spending is claimed gradually. The ATO splits it into depreciating assets (plant and equipment) and capital works (the building itself).

Depreciating assets

Items that are separate from the structure, such as appliances, carpets, floating timber floors, curtains and furniture, decline in value over their effective life. You can use the Commissioner's effective life or your own reasonable estimate, with either the diminishing value or prime cost method.

Under current ATO guidance, an asset costing $300 or less can be claimed in full straight away, unless it is part of a set that together costs more than $300. Assets worth less than $1,000 can be grouped in a low-value pool.

There is an important limit on used items. For residential rentals, the ATO generally denies depreciation on second-hand assets, meaning items already in a property when you buy it or items from your own home that you later rent out. The exceptions include assets bought before 7:30pm on 9 May 2017 and installed before 1 July 2017, property used in a business, and certain entities such as companies. New assets you buy for the property can still be depreciated, as can assets in a newly built or substantially renovated property bought within 6 months where no one else could claim them.

Capital works

Construction costs and structural improvements, such as an extension, a new kitchen, a fence, a driveway or a retaining wall, are claimed as capital works. The ATO says the rate is generally 2.5% a year over 40 years or 4% a year over 25 years. The building must have been constructed after 17 July 1985 and the claim can start only once construction is complete.

The ATO notes that a quantity surveyor can prepare a report listing the depreciating assets when a property is bought, and recommends keeping at least a spreadsheet of them. Capital works deductions also reduce the cost base when you sell, so they are worth tracking carefully. See depreciation in our glossary.

Repairs, improvements and initial repairs

How a cost is classified decides whether it is claimed this year or spread over many years, so the distinction matters. The ATO separates four kinds of work:

• Repairs and maintenance fix wear, tear or damage that happened while the property was rented, or keep it in a tenantable condition. Examples include replacing a broken window pane, part of a gutter or a section of fence, repainting faded walls and cleaning the pool. These are generally deductible in the year paid.
• Improvements make something better, more valuable or different in character, such as a bathroom remodel, a pergola or replacing a fibro wall with a brick feature wall. These are capital works, claimed over time.
• Replacing an entire item, such as a whole toilet or a full set of kitchen cupboards, is not a repair. It is claimed as capital works or as a depreciating asset.
• Initial repairs fix defects that existed when you bought the property, even if you did not know about them. They are not immediately deductible; structural items can usually go to capital works over 40 years, and the cost forms part of the cost base on sale, reduced by any capital works amounts claimed.

If you do the work yourself, only the materials are deductible, not the value of your labour. Where repairs and improvements are done together, the ATO recommends getting an itemised invoice so the repair portion can be separated and claimed.

Negative gearing now and from 1 July 2027

A property is negatively geared when the deductible expenses, including interest, are more than the rent. In its Rental properties 2026 guide, the ATO explains that the resulting net rental loss can generally be deducted against other income such as salary, wages or business income, and any loss your other income cannot absorb is carried forward. If your rental losses lead to a refund each year, the ATO notes you can apply for a PAYG withholding variation so less tax is withheld from your pay.

The rules are changing. On 12 May 2026, in the 2026–27 Federal Budget, the Government announced it would limit negative gearing for residential property investments to new builds. The ATO's page on the measure (last updated 29 June 2026) states that these measures are now law and that they apply from 1 July 2027. The legislation is the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received assent on 26 June 2026 according to the Parliament of Australia.

• Existing investments: properties held at the time of the announcement, 7:30pm AEST on 12 May 2026, are exempt from the negative gearing change.
• Start date: 1 July 2027, which is the 2027–28 income year. The ATO's rental expenses guidance confirms the change does not apply in 2025–26 tax returns, and because it starts on 1 July 2027 it does not apply to the 2026–27 income year either.
• Capital gains tax: the same law replaces the 50% CGT discount for individuals, trusts and partnerships with cost base indexation and a 30% minimum tax rate, for gains that accrue after 1 July 2027. Our capital gains tax guide covers this.

As at 29 July 2026, the ATO's page summarises the change but does not yet explain the detailed mechanics, such as exactly which properties count as new builds or how losses on non-exempt properties will be handled. For an established property bought after that time, the after-tax position from 1 July 2027 depends on details still to be explained, so general information like this guide is no substitute for advice on a specific purchase. See negative gearing in our glossary.

Records to keep

According to the ATO, rental records are generally kept for 5 years, counted, depending on the situation, from when you lodge, your last depreciation claim on an asset, when it becomes certain no CGT event can happen to the property, or when a dispute with the ATO is resolved. Where there is a tax loss or net capital loss, the ATO says records showing how it was worked out are kept until the amendment period ends for the year the loss is fully used.

• property manager statements, rent records and details of any bond kept
• loan documents and statements showing the interest charged
• receipts and invoices for rates, land tax, insurance, agent fees, repairs and other costs
• depreciation schedules, capital works details and before and after photos of works
• purchase contract, conveyancing documents and borrowing costs, and later the sale documents

Records can be paper or digital. Our guide to record keeping for individuals covers the general rules, and the tax return checklist lists what to bring. For help with your rental schedule, see our individual tax returns service or contact us.

Frequently asked questions

General information only, not personal advice. Tax rules change and your circumstances matter, so talk to us before acting. See our disclaimer.