Rental Property Deductions: What Australian Investors Can Claim in 2025–26

The end of the financial year is fast approaching. Now is the perfect time for rental property investors to review their deductions. Make sure you’re claiming everything you can. The ATO lets property owners claim a wide range of costs. But the rules around what you can claim, when, and how much can be tricky.

Whether you own a single investment property (and its CGT effects) or a growing portfolio, knowing the difference between instant deductions and capital claims could save you thousands at tax time.

What Makes a Rental Expense Deductible?

The golden rule is simple: you can only claim costs incurred while your property is rented out or truly available for rent. If your property sits vacant without being listed, or if you use it for personal reasons during part of the year, you must split your costs.

Three Types of Rental Expenses

The ATO divides rental costs into three groups:

1. Claim right away — claimed in full in the year you pay them
2. Claim over several years — capital costs spread across multiple income years
3. Can’t be claimed — costs that are not allowed at all

Costs You Can Claim Right Away

These are the day-to-day costs of managing your rental property. You can claim them in full in the same year you pay them:

• Loan interest — interest on the mortgage used to buy the property or fund repairs
• Property management fees — agent commissions, letting fees, and management charges
• Council rates and water rates — including water usage charges if you pay them (not the tenant)
• Land tax — state and territory levies on land ownership
• Insurance premiums — building, contents, landlord, and public liability insurance
• Body corporate fees — strata levies and special levies for maintenance
• Repairs and maintenance — fixing wear and tear caused by tenants (see the important distinction below)
• Pest control, gardening, and cleaning — routine upkeep costs
• Advertising for tenants — online listings, signage, and letting costs
• Legal expenses — costs to evict a non-paying tenant or chase rental arrears
• Tax agent fees — fees paid to your accountant or registered tax agent for rental-related advice

Repairs vs. Improvements: A Critical Distinction

One of the most common mistakes landlords make is mixing up repairs and improvements. A repair restores something to its original state. For example, fixing a broken tap or patching a damaged wall. You can claim this right away.

An improvement makes the property better than before. For example, putting in a new kitchen or adding a deck. These are capital costs. You must claim them over time, not all at once.

There’s also a rule about initial repairs. If you buy a property with existing damage and fix it soon after settlement, the ATO treats those costs as capital — not instant deductions.

Capital Expenses: Claiming Over Time

Some costs provide a long-term benefit. You must spread them across multiple years.

Capital Works (Division 43)

Building costs are deducted at 2.5% per year over 40 years from the date the work was finished. This covers structural changes, extensions, and major renovations. Examples include:

• Building construction costs
• Adding rooms, garages, or carports
• Replacing an entire roof or fence
• Installing a new bathroom or kitchen

Plant and Equipment (Division 40)

Items inside the property that wear out over time can be claimed over their useful life. This includes carpets, blinds, dishwashers, air conditioners, and hot water systems. You can choose between:

• Diminishing Value Method — larger deductions in early years
• Prime Cost Method — equal deductions spread evenly over the asset’s life

Important: Since 1 July 2017, investors who buy a second-hand home cannot claim wear and tear on previously used plant and equipment. This rule does not apply to brand-new properties or to investors running a property rental business.

A quantity surveyor can prepare a schedule to find all eligible assets and maximise your claims.

Negative Gearing: Turning a Loss Into a Tax Benefit

If your total costs exceed your rental income for the year, your property is negatively geared. Under current tax law, this net rental loss can be offset against your other income — such as your salary. This cuts your overall tax bill.

If your other income isn’t enough to cover the full loss, the rest carries forward to future years. To manage cash flow during the year, you can apply to the ATO for a PAYG Withholding Variation. This cuts the tax taken from your pay to reflect your expected rental loss.

What the ATO Is Watching in 2025–26

The ATO has ramped up its data-matching for rental properties. It now gets data from:

• Banks and lenders — to check loan interest claims
• Property management software — to cross-check rental income and costs
• State rental bond bodies — to find landlords earning rental income
• Insurance companies — to check insurance claims and rental periods

The ATO can compare what you’ve declared in your tax return (see our BAS lodgement guide) against third-party data. Gaps can trigger a review or audit. The message is clear: good record-keeping is not optional.

Record-Keeping: What You Must Keep

You must keep records for at least five years from the date you lodge your tax return. These include:

• All rental income receipts
• Invoices and receipts for every expense claimed
• Loan documents and statements
• Purchase and sale contracts
• Capital works documentation (dates, costs, builder invoices)
• Depreciation schedules for all assets

Digital records are fine, as long as they are clear and complete copies of the originals.

Understanding Your Depreciation Schedule

A depreciation schedule lists every asset in your property that you can claim. It covers two groups: building (Division 43) and plant and equipment (Division 40). For a property built after September 1987, the building itself can be claimed at 2.5% per year for 40 years.

Here’s an example. David buys a brand-new apartment in Brisbane for $550,000. The building cost is $385,000. In his first year, David claims $9,625 in building deductions alone (2.5% of $385,000). On top of that, his surveyor finds $18,000 worth of plant and equipment — carpets, blinds, ovens, and air conditioning units. This gives him another $4,200 in first-year claims.

That’s nearly $14,000 in deductions before David even counts loan interest or management fees. Over five years, his total claims could exceed $55,000.

First-Year vs Ongoing Deductions

Your first year of ownership usually gives you the highest deductions. Settlement costs, borrowing costs (spread over five years), and faster plant claims all stack up. From year two onward, deductions level out as borrowing costs drop and assets age.

Plan your cash flow with this in mind. Many investors apply for a PAYG Withholding Variation in their first year. This lets them access the tax benefit all year, rather than waiting for a lump-sum refund at tax time.

Repairs vs Improvements: Real-World Examples

Getting this distinction wrong is the top reason the ATO adjusts rental property returns. Here are clear examples:

• Repair (claim now): Replacing a cracked bathroom tile with a matching tile — $150.
• Improvement (capital cost): Retiling the entire bathroom with premium porcelain — $4,500. This must be claimed over its useful life.
• Repair: Fixing a leaking tap washer — $80.
• Improvement: Replacing all tapware with modern mixer taps — $1,200.

The key test is simple. Did you restore the item to its original condition, or did you make it better? If it’s better, it’s an improvement.

Technology Tools for Tracking Rental Expenses

Gone are the days of shoeboxes full of receipts. Modern property investors use digital tools to stay organised and audit-ready:

• Accounting apps like Xero or MYOB sort rental income and costs for you.
• Receipt scanning apps such as Dext or HubDoc capture and store invoices digitally. The ATO accepts these as valid records.
• Property management platforms like PropertyMe or Console Cloud track rent payments, maintenance requests, and statements in one place.
• Spreadsheet templates work well for single-property investors. Track income, costs, and claims month by month.

Whichever method you choose, consistency is what matters most. Set aside 15 minutes each month to update your records. Come tax time, you’ll thank yourself — and so will your tax agent.

Common Deduction Mistakes Landlords Make

The ATO flags rental property returns more than almost any other category. These are the mistakes that trigger reviews most often:

• Claiming the full year when the property was vacant. If your property sat empty for six weeks between tenants without being advertised, you must reduce your deductions.
• Double-counting depreciation. Some investors claim plant and equipment deductions manually while also including them in a quantity surveyor’s schedule. Pick one method and stick with it.
• Claiming initial repairs as instant deductions. If you buy a property with a damaged roof and fix it within the first 12 months, the ATO treats this as a capital cost. It must be claimed over time, not upfront.
• Forgetting to split shared costs. If you use a holiday home for two weeks and rent it for 40 weeks, every shared cost must be split.
• Not keeping loan records separate. If you redraw from your investment loan for personal use, the interest on that portion is no longer claimable. Keep investment and personal loans in separate accounts.

Investor Case Study: First-Year Property Owner

Rachel, a 34-year-old nurse in Melbourne, purchased her first investment property in August 2025 for $620,000. She borrowed $496,000 at 6.2% interest. Here’s what her first-year deduction profile looks like:

• Loan interest: $28,100 (10 months of the financial year)
• Property management fees: $2,480
• Council and water rates: $3,200
• Insurance: $1,650
• Depreciation (building): $8,525 (2.5% of $341,000 construction cost)
• Depreciation (plant and equipment): $3,800 (new property, diminishing value method)
• Borrowing costs: $1,900 (spread over five years = $380 in year one)

Rachel’s total rental income was $31,200. Her total deductions came to $48,135. That $16,935 net rental loss offsets her nursing salary. It cuts her taxable income now and may affect her CGT when she sells. At her marginal rate of 32.5%, this saves her roughly $5,504 in tax.

Rachel applied for a PAYG Withholding Variation so she could access the benefit throughout the year rather than waiting for her tax refund.

Don’t Miss These Often-Overlooked Deductions

Many investors leave money on the table by overlooking:

• Borrowing costs — loan setup fees, lender’s mortgage insurance, and mortgage stamp duty. Spread these over five years or the loan term.
• Surveyor fees — the cost of a depreciation report is itself claimable.
• Stationery and phone costs — minor admin costs tied to managing your property.
• Prepaid costs — if you prepay up to 12 months of claimable costs before 30 June, you may be able to claim them this year.

Get Expert Rental Property Tax Advice from TaxServe Australia

Rental property tax is one of the most complex areas of Australian tax law. The ATO’s data-matching means the stakes for getting it wrong are high. Whether you’re a first-time investor or managing a large portfolio, the team at TaxServe Australia can help you claim every dollar you’re entitled to and avoid costly mistakes.

Contact TaxServe Australia today to book your rental property tax consultation. Our experienced accountants based in North Lakes, Queensland, work with property investors across Australia.

Sources

• Australian Taxation Office — Rental Properties 2025 Guide
• ATO — How to Claim Rental Expenses
• ATO — Work Out the Category of Your Rental Expense
• ATO — Depreciating Assets in Rental Properties
• ATO — Rental Property Data Matching
• ATO — Negative Gearing