Rental Property Tax Deductions in Australia: The Complete Guide for Property Investors (2025-26)

More than 2.2 million Australians own an investment property. A large proportion of them under-claim at tax time — not because they are dishonest, but because investment property returns are genuinely complex and the rules around what can be claimed, and how, are not obvious. At Lodge with P&D Accountants, we work with over 200 property investor clients across Australia. In our experience, the gap between what investors claim and what they are actually entitled to often runs into thousands of dollars each year. This guide covers every major deduction category, explains the ATO's current compliance priorities, and sets out what your accountant needs from you to prepare an accurate return.

Immediately deductible rental property expenses

These costs can be claimed in full in the year they are incurred, provided the property was rented or genuinely available for rent during that period:

• Loan interest on the investment property mortgage
• Property management fees and letting agent commissions
• Council rates, water rates, and land tax
• Insurance premiums, including landlord insurance
• Repairs and maintenance (not capital improvements — see below)
• Pest control, cleaning, and gardening
• Advertising costs to find tenants
• Body corporate fees and strata levies
• Accounting and tax agent fees related to the investment

The difference between a repair and an improvement

This distinction is one of the most audited areas in rental property returns, and getting it wrong is costly.

A repair restores something to its original working condition and is immediately deductible. An improvement adds new capability, extends the useful life of the asset, or upgrades it to a higher standard — and must be claimed as capital works depreciation over 25 or 40 years, not as an immediate deduction.

Replacing a broken fence panel with the same style of fencing is a repair. Pulling out the old fence entirely and installing a rendered masonry boundary wall is an improvement. The ATO identifies misclassified improvements through data matching against property management records and council approval databases. If you are unsure how to categorise a specific expense, ask your accountant before you claim it.

Depreciation: the most underused deduction in property investment

Depreciation is a non-cash deduction. It does not require you to spend a dollar to claim it. Research suggests that around 80 per cent of property investors are either not claiming depreciation at all or are claiming it incorrectly.

Division 43: Capital works

The structural components of the building — walls, floors, roof, fixed fittings — depreciate at 2.5 per cent per year for properties constructed after 16 September 1987. A residential property built in 2010 with $600,000 in construction costs generates a capital works deduction of $15,000 per year.

Division 40: Plant and equipment

Removable assets such as air conditioning units, hot water systems, carpets, dishwashers, and blinds depreciate at rates set by ATO schedules based on the effective life of each item. Note that for properties purchased after 9 May 2017, second-hand plant and equipment that was already in the property at the time of purchase is not claimable. Assets you install as a new owner remain fully claimable.

To maximise depreciation claims, you need a tax depreciation schedule prepared by a qualified quantity surveyor. The schedule is prepared once and used in your return every year. The cost, typically between $400 and $700, is itself tax deductible.

Negative gearing and how it reduces your tax bill

When a rental property's deductible expenses exceed its rental income, the resulting loss is negatively geared. That loss is offset against your other income — including salary — which reduces your total taxable income and produces a tax saving in the current year.

For an investor earning $100,000 in salary with a $14,000 negatively geared property loss, taxable income falls to $86,000. At a 32.5 per cent marginal rate, the tax saving is approximately $4,550. The net out-of-pocket cost of holding the property is the $14,000 loss minus the $4,550 tax saving.

Negative gearing is a standard application of Australian tax law. The ATO does not penalise investors who legitimately operate at a loss. What it investigates is whether the expenses are real, whether the property was genuinely available for rent throughout the period claimed, and whether the rental income declared matches what the property manager has reported.

ATO compliance priorities for property investors in 2025-26

The ATO is currently cross-referencing 2.3 million property management records spanning 2018 to 2026. This year's priority areas include:

• Rental income discrepancies between the return and property manager records
• Holiday homes advertised for rent but only genuinely available during periods that suit the owner
• Capital improvements incorrectly claimed as immediate repairs
• Mortgage interest claimed on the full loan balance where equity was redrawn for personal purposes

If you have redrawn equity from your investment loan to fund a car, holiday, or renovation to your home, only the portion of the interest attributable to the investment borrowing remains deductible. Your accountant needs to know about any redraws during the year to calculate the correct apportionment.

What to give your accountant

• The annual statement from your property manager showing all income received and expenses paid
• Your depreciation schedule, or the construction date of the property if you do not have one
• Loan statements showing interest charged during the year
• Invoices for any repairs, maintenance, or improvement work
• Records of any periods when the property was used personally rather than rented

P&D Accountants has a dedicated property investor tax service. We prepare rental schedules as part of individual tax returns, coordinate depreciation schedules with quantity surveyors, and check every deduction category against the ATO's current requirements.

Frequently asked questions