Investment Property Tax Deductions Australia: The Complete Guide

Investment properties generate two types of tax benefits: deductions against rental income (and historically against other income via negative gearing), and the 50% CGT discount on capital gains from properties held more than 12 months. Understanding which expenses are immediately deductible, which are depreciated over time, and which cannot be claimed at all is the foundation of correct rental property tax compliance.

The ATO identifies errors in over 80% of rental property tax returns it examines the most common being incorrect categorisation of repairs vs capital improvements, overclaiming travel expenses, and claiming body corporate sinking fund contributions as immediate deductions. This guide covers every category correctly.

What Is Negative Gearing?

A rental property is negatively geared when the total expenses of owning it (loan interest, management fees, council rates, depreciation, etc.) exceed the rental income it generates. The resulting loss has historically been deductible against other income, such as salary, wages, or business income, reducing the overall tax bill.

Example: a property generates $28,000 in rental income for the year. Total deductible expenses are $38,000 (interest $22,000, depreciation $8,000, management fees $2,800, rates $2,000, insurance $1,200, other $2,000). Net rental loss: $10,000. Under existing negative gearing rules, this $10,000 loss offsets other income. For someone earning $120,000 in salary (37% marginal rate), the tax saving is approximately $3,700 for the year.

The 2026 Budget change restricts this offsetting for properties purchased after 12 May 2026: from 1 July 2027, those losses can only offset rental income from other rental properties, not salary or other income. For existing properties and all properties purchased before 12 May 2026, the existing negative gearing rules continue unchanged.

Investment Property Expenses: Immediately Deductible

The following expenses are deductible in the year they are incurred (the year you pay them, if you use cash-basis accounting):

Loan Interest: The Largest Deduction

Loan interest is typically the biggest deduction for investment property owners and one of the most frequently overclaimed. The rules:

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  Only interest counts, not principal: principal repayments reduce debt but produce no tax deduction. On a $600,000 interest-only loan at 6%, the deductible interest is approximately $36,000/year. On the same loan on principal and interest terms, only the interest component of each repayment is deductible
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  Split loans must be apportioned: if you have a single loan drawn down partly for investment and partly for personal use (e.g., refinancing your home loan to fund an investment deposit), only the investment-purpose proportion of the interest is deductible. The ATO tracks loan purpose, not loan name
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  Redraw contamination: if you redraw from your investment loan for personal purposes (holiday, car, home renovations), the interest on the redrawn amount becomes non-deductible. This can irreversibly taint the deductibility of that portion of the loan
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  Prepaid interest: individual investors can prepay up to 12 months of future interest before 30 June and claim the deduction in the current financial year useful in high-income years

Repairs vs Capital Improvements: The Critical Distinction

This is the area the ATO identifies errors in most frequently. The rule is simple in principle:

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  Repair: restores something to its original working condition. Immediately deductible
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  Capital improvement: adds new function, capability, or value that did not previously exist. Deductible over time via Division 43 building depreciation (2.5%/year)

Depreciation: Building Allowance and Plant and Equipment

Depreciation allows you to claim the gradual loss of value in the building structure and removable items (plant and equipment) over time. Two separate Division systems apply:

Borrowing Costs

The costs of arranging the investment loan are deductible, but not immediately. They are spread over the life of the loan or 5 years, whichever is shorter:

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  Lenders’ mortgage insurance (LMI)
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  Loan application and establishment fees
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  Title search fees charged by the lender
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  Costs of registering the mortgage
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  Any mortgage broker fees

Not included in borrowing costs: stamp duty on the property purchase and conveyancing fees are capital costs that form part of the property's cost base for CGT purposes; they are not deductible at all as expenses. They will reduce your capital gain when you eventually sell.

Proportional Claims: Mixed Use and Partial Year

Property Not Rented for the Full Year

If the property was not available for rent for the full year (it was vacant for renovation, used personally, or purchased mid-year), you can only claim deductions for the period the property was available for rent or actually rented. Expenses during periods of personal use are not deductible. Expenses during genuine attempts to rent (vacancy while searching for tenants with active advertising) are deductible.

Holiday Homes and Mixed-Use Properties

A property used personally for part of the year and rented for the remainder has deductions apportioned between the rental and personal-use periods. The ATO scrutinises holiday homes in particular, a property in a popular vacation area with limited bookings, but significant personal use is a compliance focus area. Deductions must accurately reflect the proportion of time the property was genuinely available for rent at market rates.

What You Cannot Claim

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  Principal repayments: the portion of each mortgage payment that reduces the loan balance. Only interest is deductible
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  Stamp duty on purchase: not deductible as an expense; adds to the cost base for CGT
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  Conveyancing fees: same as stamp duty capital cost, not a deductible expense
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  Capital improvements: not immediately deductible, but depreciated at 2.5%/year via Division 43
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  Body corporate sinking fund/capital works fund: not deductible when paid; deductible when the capital works are actually carried out
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  Travel to inspect your rental property: since 2017-18, individual investors cannot deduct travel to inspect residential rental properties. This applies to flights, accommodation, and vehicle travel for property inspections
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  Costs of selling the property: agent commissions, advertising, and conveyancing on sale are capital costs that reduce the capital gain, not deductible expenses in the year of sale

Capital Gains Tax on Investment Property

When you sell an investment property, the capital gain (sale price less cost base) is assessable income in the year of sale. The 50% CGT discount applies if you held the property for more than 12 months before sale only half the net capital gain is included in your assessable income.

The cost base of the property includes: purchase price, stamp duty on purchase, conveyancing and legal fees on purchase, agent commissions and selling costs on sale, and any capital improvements made during ownership. Keeping records of all capital improvements (not just repairs) from the date of purchase is critical. A $25,000 kitchen renovation that occurred 15 years ago reduces your capital gain by $25,000 if you have the records.

For the 2026 Budget negative gearing changes: the restriction on offsetting rental losses applies to ongoing income tax, not to CGT. The 50% CGT discount is not affected by the 2026 Budget announcement. However, properties that are negatively geared post-2027 for investment and personal income purposes will be assessed on a combined income basis with the net rental income or loss first allocated within the rental pool.

See our capital gains tax Adelaide service for CGT calculations on property sales.

How The Kalculators Can Help

Rental property tax returns are the area where the ATO identifies errors most frequently and where the errors most often cost investors money through missed deductions rather than through overclaiming. Our tax return service for property investors covers all aspects of rental income and deduction reporting: correctly categorising repairs vs capital improvements, applying depreciation schedules from quantity surveyor reports, calculating borrowing cost amortisation, and ensuring loan interest claims are correctly apportioned.

For investors considering property purchases in 2026, the negative gearing rule change requires careful analysis of the after-tax return on properties purchased after 12 May 2026 versus before that date the tax position differs materially. Contact us for an assessment before committing to a purchase.