Investment Property Tax Deductions (Australia)

Australian investment property owners can claim a range of tax deductions under section 8-1 of the ITAA 1997, including loan interest, depreciation, borrowing costs, and landlord insurance. This guide covers every deduction generally available on an Australian investment property, what cannot be claimed, and a worked example showing how the numbers add up on a typical $500,000 property.

How much are investment property deductions worth?

Every deductible expense reduces your taxable income. The value of each deduction depends on your marginal tax rate — the higher your income, the more each dollar of deductions saves you in tax.

Marginal rate	Income range (2025-26)	Value of $1,000 deduction	Saving on $20,000 deductions
16%	$18,201 — $45,000	$160	$3,200
30%	$45,001 — $135,000	$300	$6,000
37%	$135,001 — $190,000	$370	$7,400
45%	Over $190,000	$450	$9,000

Source: (ATO — Tax rates for Australian residents). 2025-26 rates for Australian residents.

An investor on $100,000 with $20,000 in deductions saves approximately $6,000 in tax. Each $1,000 in deductions at this rate reduces income tax by approximately $300.

What deductions can you claim on an investment property?

The following expenses are generally deductible when the property is rented or genuinely available for rent. They fall into five categories: borrowing expenses, holding costs, rental management, depreciation, and other costs.

Summary table

Deduction	Typical annual range	Tax treatment	Notes
Loan interest	$15,000 — $40,000	Immediate	Only interest, not principal. Largest single deduction.
Borrowing costs	$500 — $2,000/yr	Over 5 years	Loan establishment, LMI, title search, mortgage broker.
Council rates	$1,200 — $3,000	Immediate	Varies by local government area.
Water charges	$600 — $1,200	Immediate	Only the portion you pay (not tenant-paid usage).
Insurance	$1,000 — $2,500	Immediate	Building + landlord + contents if furnished.
Property management	$1,500 — $3,500	Immediate	Letting fees, advertising, lease renewals included.
Repairs and maintenance	$500 — $3,000	Immediate	Must restore to original condition, not improve.
Depreciation (Div 43)	$3,000 — $10,000	Non-cash	Building structure at 2.5%/year over 40 years.
Depreciation (Div 40)	$2,000 — $8,000	Non-cash	Plant and equipment over individual effective lives.
Body corporate / strata	$2,000 — $6,000	Immediate	Apartments/townhouses. Capital levies may be depreciated.
Land tax	$0 — $5,000+	Immediate	Varies by state. See land tax calculator.
Pest control and cleaning	$200 — $800	Immediate	Between-tenancy costs.
Tax agent fees	$200 — $500	Immediate	Only the rental section of your return.
Quantity surveyor report	$500 — $770	Immediate	One-off cost; the fee itself is deductible.

Borrowing expenses (amortised over 5 years)

Borrowing costs are the expenses incurred in taking out a loan to purchase the investment property. Unlike most other deductions, borrowing costs are not deducted in full in the year you pay them — they are spread (amortised) over 5 years or the life of the loan, whichever is shorter (ATO — Borrowing expenses (rental property)). If total borrowing costs are $100 or less, you can claim the full amount immediately.

Borrowing costs include:

• Loan establishment fees — application fees, valuation fees charged by the lender
• Lenders mortgage insurance (LMI) — if you borrowed more than 80% of the property value, the LMI premium is a borrowing cost deductible over 5 years, not upfront
• Title search fees — the cost of searching the title register
• Mortgage broker fees — fees paid to a broker for arranging the loan
• Stamp duty on the mortgage — stamp duty on the loan document itself (not the property transfer stamp duty, which is a capital cost)
• Legal fees for the loan — solicitor costs relating to the loan (not the property purchase)

Example: You pay $3,500 in borrowing costs when you take out a $400,000 investment loan. You settled on 1 January 2025. For the 2025-26 financial year (181 days from 1 Jan to 30 Jun), the deduction is $3,500 / 5 years x 181/365 = $347. In each subsequent full financial year, the deduction is $700 ($3,500 / 5).

Note that borrowing costs must be spread over 5 years — they cannot be claimed in full in year one.

Holding costs

Loan interest is usually the largest single deduction. Only the interest portion of your mortgage repayment is deductible — not principal repayments. If the loan was partly used for private purposes (for example, a redraw used for a holiday), only the investment portion of the interest is deductible.

Council rates charged by your local government are deductible in full for an investment property.

Water charges include water rates and usage charges. If the tenant pays water usage directly, you can only claim the portion you pay.

Insurance includes building insurance (covers the structure), landlord insurance (covers rent default, liability, and tenant damage), and contents insurance if you provide furnished accommodation. Landlord insurance is one of the most overlooked deductions — it typically costs $1,000—$2,500 per year and is fully deductible.

Land tax is the state-based tax on your investment property land. The amount depends on your state, the land value, and whether you own other properties. The land tax calculator can estimate the liability.

Body corporate fees (strata levies) for apartments and townhouses are deductible. Administration fund levies are deductible immediately. Special purpose levies for capital works (for example, a new roof or lift replacement) may need to be treated as capital expenditure and depreciated rather than claimed immediately.

Rental management costs

Property management fees charged by your agent for finding tenants, collecting rent, and managing the property are deductible. This includes letting fees, advertising for tenants, lease renewal fees, and routine inspection costs.

Repairs and maintenance that restore something to its original condition are generally deductible immediately. Common examples include fixing a leaking tap, repainting to the same standard, replacing broken glass, patching damaged walls, and fixing broken fence palings. Initial repairs (fixing damage that existed when you bought the property) are generally not immediately deductible — they are treated as capital improvements.

Pest control and cleaning costs between tenancies are deductible.

Gardening and lawn mowing for the rental property are deductible.

Depreciation (non-cash deductions)

Depreciation is often the most significant deduction investors miss, particularly on newer properties. It is a non-cash deduction — you do not pay anything out of pocket, but it reduces your taxable income. Depreciation is split into two categories:

• Division 43 (capital works) — the building structure itself, at 2.5% per year of construction cost over 40 years
• Division 40 (plant and equipment) — fixtures, fittings, and appliances (carpet, blinds, hot water systems, air conditioning), each depreciated over its ATO-determined effective life

For properties purchased after 9 May 2017, Division 40 deductions can only be claimed on new items you install yourself — not second-hand items already in the property (ATO — Second-hand depreciating assets (depreciation section)). Division 43 is not affected by this rule.

For full details, see our depreciation guide.

Prepaid expenses

If you pay for an expense in advance — for example, 12 months of landlord insurance or council rates — you can generally claim the full amount in the year you pay it, provided:

• The prepayment covers a period of 12 months or less, and
• The service period ends on or before 30 June of the following financial year

This can be useful for tax planning near the end of the financial year. For example, paying your landlord insurance in June for the coming 12 months allows you to claim the full premium in the current financial year.

Other deductible expenses

• Tax agent fees for the rental section of your tax return
• Quantity surveyor fees for preparing a depreciation schedule (the cost is itself deductible)
• Legal fees related to the tenancy (for example, eviction costs, lease preparation)
• Stationery and postage for rental property management
• Interest on amounts borrowed to purchase depreciating assets for the property

What expenses can you not claim on an investment property?

Several common expenses are not deductible. Claiming them incorrectly is one of the top triggers for ATO reviews of rental property returns.

Principal loan repayments

Only interest is deductible. The principal portion of your mortgage repayment reduces your loan balance but is not a tax deduction.

Travel to the property

Since 1 July 2017, travel expenses to inspect, maintain, or collect rent from a residential rental property are generally no longer deductible (ATO — Rental properties and travel expenses). This includes flights, accommodation, and car expenses. Travel to a commercial rental property may still be deductible.

Capital improvements

An improvement makes the property better than its original condition. Examples include:

• Replacing a laminate kitchen with stone benchtops
• Adding a new bathroom or extending the property
• Building a deck, pergola, or carport
• Installing a new air conditioning system where there was none before
• Renovating to a higher standard than the original

Improvements are not deductible immediately — they are depreciated over their effective life (Division 40) or as capital works (Division 43).

Initial repairs

Fixing damage that existed when you bought the property is generally treated as a capital expense, not an immediate deduction. For example, if the property had a broken window or damaged roof at settlement and you fix it, that cost is typically added to the cost base rather than claimed as a repair.

Expenses when the property is not available for rent

If the property is used privately, deliberately withdrawn from the rental market, or listed at an unreasonably high rent to discourage tenants, expenses during that period are generally not deductible.

Private use portions

If you live in part of the property or use a mixed-purpose loan, only the portion relating to the rental or investment use is deductible. You must apportion expenses accurately.

Repairs vs improvements: the distinction that triggers ATO reviews

Getting this classification wrong is one of the most common mistakes and a frequent trigger for ATO scrutiny.

	Repair (immediately deductible)	Improvement (depreciated)
Definition	Restores to original condition	Makes better than original
Example	Replacing damaged carpet with similar quality	Upgrading from carpet to timber flooring
Example	Repainting walls the same colour	Painting plus adding a new feature wall
Example	Fixing broken fence palings	Replacing the whole fence with a new style
Example	Replacing a broken hot water system with a similar one	Upgrading from electric to solar hot water
Tax treatment	Full deduction in the year incurred	Depreciated over effective life

When in doubt, consult your tax agent. The cost of getting this wrong can include ATO adjustments, penalties, and interest on unpaid tax.

Worked example: $500,000 investment property

The following worked example shows how deductions add up for a typical residential investment property purchased for $500,000. This example is for illustration only — your actual figures will vary.

Property details:

• Purchase price: $500,000
• Loan: $400,000 at 6.2% interest (interest-only)
• Weekly rent: $500 (50 weeks occupied, 2 weeks vacant)
• Property type: 3-bedroom house, built 2012, purchased 2024

Annual income:

• Gross rental income: $25,000 ($500 x 50 weeks)

Annual deductions:

Expense	Amount	Notes
Loan interest	$24,800	$400,000 x 6.2%
Borrowing costs (amortised)	$600	$3,000 total / 5 years
Council rates	$1,800
Water charges	$900
Building insurance	$1,200
Landlord insurance	$1,600	Often missed
Property management (7.7%)	$1,925	Of gross rent collected
Repairs and maintenance	$1,000	Average year
Depreciation — Div 43	$6,250	$250,000 construction cost x 2.5%
Depreciation — Div 40	$3,500	New items installed by investor
Land tax (WA)	$570	Depends on state and land value
Pest control	$250
Tax agent fee (rental portion)	$350
Quantity surveyor fee	$660	Year 1 only; deductible immediately
Total deductions	$45,405

Net rental loss: $25,000 - $45,405 = -$20,405

Tax impact for an investor earning $100,000:

	Without property	With property
Taxable income	$100,000	$79,595
Estimated tax (incl. Medicare)	$24,967	$18,846
Annual tax saving		$6,121

Cash out-of-pocket cost: Only cash expenses count toward actual out-of-pocket cost. Depreciation ($9,750) is non-cash, so the real cash cost is $35,655 - $25,000 = $10,655/year ($205/week).

After-tax weekly cost: $10,655 - $6,121 = $4,534/year ($87/week).

This investor holds a $500,000 property for roughly $87 per week after tax. For comparison, excluding depreciation and borrowing costs from the calculation would result in an after-tax cost of approximately $165 per week.

Common deduction errors

1. Depreciation not claimed. A quantity surveyor report ($500—$770) is required to claim Division 43 and Division 40 deductions, which can total $5,000—$15,000 per year on newer properties. See our depreciation guide.
2. Borrowing costs claimed incorrectly. Loan establishment fees, LMI, title search, and mortgage broker fees are deductible over 5 years, not in full in year one.
3. Landlord insurance not claimed. Landlord insurance is fully deductible ($1,000—$2,500/year) and is separate from building insurance.
4. Principal repayments claimed as deductions. Only the interest portion of mortgage repayments is deductible.
5. Repairs and improvements confused. The ATO treats these differently — repairs are immediately deductible, improvements are depreciated.
6. Mixed-use expenses not apportioned. If the loan or property is partly private, only the investment portion is deductible.
7. Quantity surveyor fee not claimed. The cost of preparing a depreciation schedule is itself a tax deduction.
8. Prepaid expenses not considered. Paying insurance or rates in advance near EOFY can bring forward deductions into the current financial year.

How long do you need to keep records?

The ATO requires you to keep records for 5 years from the date you lodge the relevant tax return. For CGT-related records (purchase contracts, improvement invoices, depreciation schedules), keep them for the life of the investment plus 5 years — you will need them when you sell.

Records to keep include:

• Loan statements showing interest and principal split
• Receipts and invoices for every expense claimed
• Rental statements from your property manager
• Insurance policies and premium notices
• Council and water rate notices
• Body corporate levy notices
• Settlement statements from purchase (and sale)
• Depreciation schedule from your quantity surveyor

Digital copies are generally acceptable. Many property managers provide annual tax summaries that consolidate rental income and expenses.

How can you estimate your total deductions and tax saving?

The negative gearing calculator estimates how deductions translate into a tax offset and after-tax holding cost. Enter rental income, expenses, and taxable income for an estimate using current ATO rates.

The premium spreadsheet tracks deductions, depreciation, land tax, CGT, and multi-year cash flow projections in one workbook.

Disclaimer

This guide is general information only and is not tax advice or financial advice. What you can claim depends on your specific circumstances and ATO rules, which change over time. The worked example uses illustrative figures and may not reflect your situation. Consider speaking with a registered tax agent or accountant for advice about your situation.