Investment Property Tax Deductions Australia: Every Claim Explained

For most investors, loan interest is the single largest tax deduction on an investment property. The interest portion of your mortgage repayments — not the principal — is fully deductible against your rental income.

If your property is negatively geared (interest and expenses exceed rental income), the net loss is deductible against your other income, reducing your total tax bill. Use our Negative Gearing Calculator to see the after-tax impact.

Borrowing costs incurred to take out the loan — including loan establishment fees, mortgage broker fees, stamp duty on the mortgage (not the property), and lenders mortgage insurance (LMI) — are deductible, but spread over five years or the loan term (whichever is shorter) rather than claimed immediately.

If you use the loan for mixed purposes (e.g., redrawing equity to fund personal expenses), only the portion used for the investment property is deductible. Keeping a separate offset account for personal spending and not redrawing equity for private use keeps your interest fully deductible.

A range of ongoing holding costs are fully deductible in the year they are incurred:

• Council rates and water rates: Fully deductible in the year paid
• Land tax: Deductible where it relates to a property used to earn rental income
• Body corporate / strata fees: Ongoing administration fees are deductible; special levies for capital improvements are not (they are added to the cost base for CGT)
• Landlord insurance: Fully deductible — this covers you for loss of rent, damage by tenants, and legal liability
• Property management fees: The agent's management fee (typically 7-10% of rent), letting fees, and lease preparation fees are all deductible
• Advertising for tenants: Deductible in the year incurred

Keep all invoices and statements. Your property manager's annual financial statement is an essential document at tax time.

The ATO draws a firm line between repairs (immediately deductible) and capital improvements (added to the cost base and depreciated or claimed as a building allowance).

Repairs: Fixing something that has broken or deteriorated — replacing a broken tap, patching a leaking roof, repairing storm damage, replacing a broken window. These are fully deductible in the year you pay for them.

Initial repairs: Defects that existed when you bought the property are not repairs — they're capital expenditure, even if you're literally fixing something. For example, replacing a termite-damaged floor you knew about when purchasing is a capital cost, not a repair.

Capital improvements: Adding a new bathroom, replacing an entire roof structure, renovating a kitchen, or adding a garage. These are not immediately deductible — they're depreciated as a capital works deduction at 2.5% per year over 40 years.

If you're unsure whether a cost is a repair or improvement, document what was replaced and why, and ask your tax agent before lodging.

Depreciation is often the most under-claimed deduction for investment property owners. There are two types:

Division 43 — Capital works (building allowance): If your property was built after 16 September 1987, you can claim 2.5% of the original construction cost per year. For a property that cost $200,000 to build, that's a $5,000 annual deduction — without spending a cent. To claim this, you need a quantity surveyor's report estimating construction costs.

Division 40 — Plant and equipment: This covers depreciable assets within the property — carpet, blinds, hot water systems, air conditioners, ovens, dishwashers, and more. Each item is depreciated over its ATO effective life. However, since May 2017, second-hand plant and equipment can only be depreciated if you're a new property buyer of a brand-new property, or a property that hasn't previously been lived in. Existing landlords who bought properties with pre-existing fittings can no longer claim depreciation on those items.

A quantity surveyor's depreciation schedule typically costs $600-$900 and pays for itself many times over in the first few years of deductions.

Can I claim travel expenses to inspect my rental property?
No. Since 1 July 2017, travel expenses to inspect, maintain, or collect rent from residential rental properties are no longer deductible for investors. This was a significant change that caught many property owners out. Travel to commercial properties can still be claimed.

What happens to my deductions if the property is vacant?
You can still claim deductions during periods of genuine vacancy — for example, while the property is being advertised for rent or undergoing repairs. However, if the property is available for personal use or not genuinely available for rent, deductions are apportioned or disallowed.

Can I claim a deduction for my time spent managing the property?
No. The ATO doesn't allow deductions for the value of your own time or labour. Only out-of-pocket expenses are deductible.

If I sell the property, do my deductions affect capital gains tax?
Yes. Depreciation claimed under Division 40 (plant and equipment) reduces your cost base and increases capital gains when you sell. Building allowance (Division 43) reduces your cost base by the amount claimed. This is automatically included in your CGT calculation. Use our CGT Calculator to estimate your liability.