Rental Property Expenses: What's Tax Deductible in Australia?
Complete guide to 40+ deductible expenses for Australian landlords. Understand ATO rules, capital vs repairs, and avoid common mistakes that trigger audits.
Contents
Australian landlords can claim numerous tax deductions on rental property expenses, but the ATO has strict rules about what qualifies. Understanding the difference between immediate deductions (repairs) and capital improvements (depreciated over time) is critical—get it wrong and you could face penalties or lose thousands in legitimate claims.
💡 Key Principle
The ATO allows deductions for expenses that are "directly related to earning rental income." This means you can claim costs while the property is rented or genuinely available for rent, but not during periods of private use or major renovations.(ATO source)
1. Immediate Deductions (Claim in Full This Year)
These expenses can be claimed 100% in the year you incur them. Keep every receipt—the average landlord claims $15,000-$25,000 annually in immediate deductions.
Property Management & Admin
- Property management fees: Typically 5-8% of rental income + letting fees (average $2,000-$4,000/year)
- Real estate agent commissions: Letting fees, tenant finding costs, marketing
- Advertising: Rental listings on realestate.com.au, Domain, newspaper ads
- Accounting & tax agent fees: Cost to prepare rental property tax return
- Legal fees: Lease preparation, tenant disputes (but not purchase/sale costs)
- Stationery & office supplies: Paper, printer ink for rental documentation
Repairs & Maintenance (Initial Condition)
Critical rule: Repairs restore the property to its original condition. Improvements make it better than before.
- Fixing broken items: Repairing leaky taps, broken windows, damaged doors
- Painting: Repainting walls in existing colors (not initial paint on new property)
- Replacing damaged items: Broken light fixtures, cracked tiles, damaged carpet
- Pest control: Termite treatment, pest inspections
- Cleaning: Professional cleaning after tenants move out
- Gardening & lawn care: Mowing, weeding, garden maintenance
- Gutter cleaning: Regular maintenance to prevent damage
- Pool maintenance: Cleaning, chemicals, minor repairs
⚠️ Warning: Initial Repairs
Repairs made immediately after purchasing a property (before renting it out) are NOT deductible. The ATO considers these "initial repairs" as capital improvements. You can only claim repairs after the property is genuinely available for rent.(ATO source)
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Ongoing Property Costs
- Council rates: Fully deductible while property is rented
- Water charges: Service charges (not usage if tenant pays)
- Strata fees: Body corporate fees for units/townhouses
- Insurance premiums: Landlord insurance, building insurance, contents insurance
- Land tax: If applicable in your state (not claimable on PPOR)
- Emergency repairs: After-hours plumber, electrician, locksmith
Interest & Finance Costs
- Loan interest: Interest portion of mortgage repayments (not principal)
- Bank fees: Loan establishment fees, account keeping fees
- Mortgage broker fees: If related to investment loan
- Line of credit interest: If used to purchase or improve rental property
💰 Example: Negative Gearing
Landlord earning $50,000 salary + $18,000 rental income ($68,000 total):
- Rental income: $18,000
- Expenses: $25,000 (interest, rates, management, repairs)
- Rental loss: -$7,000 (negatively geared)
- Taxable income: $68,000 - $7,000 = $61,000
- Tax saved: ~$2,700 (39% tax rate)
Vehicle & Travel
- Travel to inspect property: 88¢/km or actual expenses (log book method)
- Travel to collect rent: If tenant pays cash (rare)
- Travel for repairs: Trips to hardware store, meetings with tradespeople
- Parking & tolls: When traveling for rental property purposes
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2. Capital Improvements (Depreciated Over Time)
Capital improvements add value or extend the property's useful life. These are NOT immediately deductible— instead, you claim depreciation over 10-40 years depending on the asset type.
Major Renovations (Capital Works - 2.5% per year for 40 years)
- Building extensions: Adding rooms, second story, garage
- Structural alterations: Removing walls, reconfiguring layout
- New kitchens: Complete kitchen replacement (not just new appliances)
- New bathrooms: Full bathroom renovation including plumbing
- Swimming pools: New pool construction
- Driveways & paths: New concrete, paving
Plant & Equipment (Depreciation - 2.5% to 40% per year)
Note: From July 1, 2017, second-hand plant & equipment purchases are no longer depreciable (only applies to first owner). Existing assets continue depreciating.
- Appliances: Ovens, dishwashers, hot water systems (10-15 years)
- Air conditioning: Split systems, ducted cooling (10-15 years)
- Floor coverings: Carpets, vinyl, tiles (10 years)
- Window treatments: Blinds, curtains (5-10 years)
- Furniture: If property is furnished (10 years)
- Light fixtures: Ceiling fans, chandeliers (5-10 years)
💡 Pro Tip: Depreciation Schedule
A quantity surveyor can prepare a depreciation schedule ($500-$800) that identifies EVERY depreciable item in your property. Average landlord claims $5,000-$9,000/year in depreciation deductions—this service pays for itself in the first year.
3. Repairs vs Improvements: Critical Distinction
This is where most landlords get audited. The ATO has specific tests to determine if work is a repair (immediately deductible) or improvement (capitalized).
ATO's 3-Part Test:
- Did it restore the item to its original condition? → Repair (deductible)
Did it make the item better than before? → Improvement (capitalized) - Was it part of a larger project? If yes, the entire project is capital
Example: Repainting one wall = repair. Repainting entire house during renovation = capital. - Did it replace something that wasn't broken? → Likely improvement
Example: Replacing working kitchen with modern one = capital improvement.
Real-World Examples:
| Expense | Repair (Immediate) | Improvement (Capital) |
|---|---|---|
| Roof | Fixing leak, replacing broken tiles | Complete roof replacement |
| Kitchen | Fixing broken oven, leaky tap | New kitchen cabinets & benchtops |
| Flooring | Patching damaged section | Replacing all carpet with timber |
| Painting | Repainting damaged wall | Full interior repaint during reno |
| Hot Water | Like-for-like replacement | Upgrading to solar hot water |
| Windows | Replacing broken glass | Installing double-glazed windows |
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4. Common Mistakes That Trigger ATO Audits
❌ Mistake #1: Claiming private use
Issue: Claiming expenses while you or family members live in the property.
Example: Claiming full-year interest on holiday home rented 6 weeks/year.
Fix: Only claim expenses proportional to rental periods (6/52 = 11.5% claimable).
❌ Mistake #2: Initial repairs
Issue: Claiming repairs made immediately after purchase before renting.
Example: Spending $20K fixing up property before first tenant—claiming as repair.
Fix: These are capital improvements. Depreciate or add to cost base for CGT.
❌ Mistake #3: Misclassifying improvements as repairs
Issue: Claiming immediate deduction for capital improvements.
Example: New $15K kitchen claimed as "repairs & maintenance."
Fix: Capital improvements depreciate over 40 years (2.5%/year = $375/year).
❌ Mistake #4: No receipts
Issue: Claiming expenses without records (5-year ATO requirement).
Example: Claiming $5K cash payments to handyman—no invoices.
Fix: Keep digital copies of ALL receipts. Use receipt scanning apps.
❌ Mistake #5: Claiming construction costs
Issue: Claiming costs related to purchasing or selling property.
Example: Stamp duty, conveyancing, building inspections claimed as deductions.
Fix: These add to property's cost base (reduce CGT when selling).
5. Record Keeping Requirements
The ATO requires landlords to keep records for 5 years from when you lodge your tax return. Digital records are acceptable (and recommended).
Essential Records:
- Rental income: Bank statements showing rent deposits, property management statements
- Expense receipts: Invoices, receipts, credit card statements for all claims
- Loan documents: Loan statements showing interest paid (separate from principal)
- Insurance policies: Proof of premiums paid
- Council rates notices: Annual rates statements
- Depreciation schedule: Quantity surveyor report (keep for life of property)
- Property photos: Before/after photos of repairs to prove restoration vs improvement
- Rental availability: Advertising evidence showing property genuinely for rent
💡 Digital Record Keeping Tips:
- Use receipt scanning apps (ReceiptClaimer, Dext, etc.) to capture receipts instantly
- Forward email receipts to dedicated email address for automatic filing
- Tag expenses by property if you own multiple rentals
- Keep backups in cloud storage (Google Drive, Dropbox, OneDrive)
- Set calendar reminders to scan receipts weekly (not at tax time!)
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6. Complete Tax Deduction Checklist
Print this checklist and review it annually to ensure you're claiming everything you're entitled to.
✅ Immediate Deductions:
✅ Capital Allowances (Depreciation):
7. Frequently Asked Questions
Can I claim expenses if my property is vacant between tenants?
Yes, as long as the property is genuinely available for rent. You need evidence: rental ads, property management reports, or emails showing you're actively seeking tenants. Extended vacancies (6+ months) without marketing may trigger ATO scrutiny.
What if I rent to family at below-market rates?
If you charge substantially below market rent (e.g., $200/week when market is $500/week), the ATO may limit your deductions proportionally. Always charge market rates to maximize deductions.
Can I claim mortgage principal repayments?
No. Only the interest portion of loan repayments is deductible. Principal repayments reduce the loan balance but aren't considered an expense. Your loan statement separates these amounts.
What about renovations before selling?
Renovations made to prepare the property for sale are NOT deductible (not earning rental income). However, these costs add to your property's cost base, reducing Capital Gains Tax when you sell.
Do I need a depreciation schedule?
Not legally required, but highly recommended. A quantity surveyor's report ($500-$800) identifies thousands in depreciation deductions most landlords miss. Average return: $5,000-$9,000/year in extra deductions (pays for itself immediately).
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