The Ultimate Guide on Investment Property Tax Deductions – 20 Rental Deductions to Claim

Knowing about your investment property tax deductions will undoubtedly boost your tax return and overall rental income.

However, many investors miss out on expense claims because they aren’t equipped with the knowledge presented by the Australian Tax Office (ATO).

Understanding the annual tax implications, such as land tax and vacant residential land tax, is crucial for property investment.

Seeing the full potential of all the tax breaks available to you could be the difference between you hoping to earn enough money from your investment property and having positive cash flow.

The following list will arm you with some useful tax tips on the best ways to maximise your investment property tax deductions.

What are Investment Property Tax Deductions?

The ATO allows investors to deduct a range of expenses, such as interest on loans, maintenance costs, and depreciation on the building and its fixtures.

So how do tax deductions actually work? In simple terms, a deduction reduces your taxable income. For example, if you earn $80,000 a year and claim $10,000 worth of deductions, the ATO will only tax you on $70,000. The lower your taxable income, the less tax you’ll pay, which means you get to keep more of your rental income.

These deductions help offset the ongoing costs of owning a rental property and can improve your cash flow over time. The more familiar you are with what you can claim, the easier it is to make confident decisions that support your long-term financial goals

What Rental Property Deductions Can You Claim?

There are several common deductions available to property investors, each covering different types of expenses you’re likely to incur while managing and maintaining a rental property. Knowing what you can claim, and how each deduction works, can help you maximise your return come tax time. Let’s take a look at the main categories you’ll want to keep in mind.

1. Depreciation

Just as it is for vehicles, general wear and tear on your investment property is inevitable. The consequence of the wear and tear will affect the financial value of your property.

This is referred to as depreciation. For property investors, having a quantity surveyor prepare a detailed tax depreciation schedule can be crucial.

Luckily, for property investors, depreciation is a rental property deduction. It’s a non-cash investment property tax deduction where you can claim deductions over time and offset against your income

Capital Works Depreciation (Division 43)

Capital works refers to the building structure and any permanent fixtures attached to the property. This includes things like walls, doors, kitchen cupboards, and bathroom fittings. If your investment property was built after 16 September 1987, you may be able to claim deductions on the construction costs through what’s known as a capital works deduction.

This type of deduction applies to structural improvements and renovations rather than ongoing maintenance. So, if you carry out any major work such as adding a new bathroom or renovating the kitchen, you generally can’t claim the full amount in the same year the expense was incurred. Instead, the cost is claimed over time, usually at a rate of 2.5 per cent per year for up to 40 years.

Unlike repairs and general maintenance, which are typically deductible right away, capital improvements are claimed gradually over the life of the building. These deductions are considered non-cash, meaning they reduce your taxable income without requiring additional out-of-pocket expenses each year.

Example:

Layla built a house on her investment property in 2001 for $400,000, she could claim $10,000 per year in capital works deductions until 2041, helping her reduce her taxable income each year through the building’s depreciation.

Plant and Equipment Depreciation (Division 40)

You can similarly claim depreciation for wear and tear on any plant and equipment assets, such as fixtures and/or fittings in the home.

Fixtures and fittings include things such as carpets, aircon, an oven, and showers, for example.

Quantity Surveyor Fees

To maximise the return on your investment, you should possibly seek the advice of a quantity surveyor. They can help prepare a depreciation schedule for your investment property.

The bonus here is that the fees are an investment property tax deduction.

2. Loan Interest

This is the biggest investment property tax deduction you can claim.

If you had to take out a loan from the bank to purchase your investment property, you are entitled to claim any interest charged on the loan as a rental property deduction. Additionally, borrowing expenses related to taking out the loan, such as loan establishment fees and legal costs, can also be claimed as deductions over time.

Example 1:

In March 2024, Jane took out a loan of $720,000 to purchase an investment property in Brisbane. She listed the property for rent straight away and had tenants in place from 1 April 2024.

Over the 2024–25 financial year, she paid $43,200 in interest on the loan, based on an average interest rate of 6 per cent.

Because the loan was used entirely for an income-producing asset, the full $43,200 interest expense is tax-deductible.

However, if Jane had used part of that loan for personal spending, such as buying a car or paying off credit card debt, she would only be able to claim the interest on the portion used for the property.

Example 2:

In July 2024, Sam took out a $650,000 loan. He used $600,000 to buy an investment unit in Melbourne and spent the remaining $50,000 on a new car.

He rented out the unit from 1 August 2024 and by the end of the financial year had incurred $39,000 in total interest on the loan.

Because part of the loan was used for personal purposes, only the interest related to the investment portion can be claimed. To work this out, Sam uses the following calculation:

Total interest expense x (investment property loan amount / total loan amount) = tax deductible interest

$39,000 × ($600,000 ÷ $650,000) = $36,000

So, Sam can claim $36,000 as a tax deduction, and the remaining $3,000 is not deductible as it relates to private use.

3. Rental Expenses

One way to generate income on your investment property is to rent it out. As a landlord, you are liable for all kinds of expenses that can be claimed as rental property deductions each year.

These expenses can be claimed in the same tax year that you paid for them.

Advertising Expenses

Making use of advertising platforms to find tenants for your property is a tax-deductible expense.

Rental Agent Fees

Should you choose to appoint a property agent to manage the property and maintain a good relationship with your tenants, then he/she will be entitled to a fee that usually amounts to between 6% and 8%.

Having a rental agent can be an investment property tax deduction

Legal Expenses

You may wish to seek legal assistance when it comes to preparing the rental documents.

Or you may find yourself in a situation where you will need legal counsel to assist you in obtaining an eviction order. Legal counsel is an investment property tax deduction.

Council Rates

These expenses cover the cost of the rubbish collection and maintenance of the street on which your property is located.

Provided that you are the one paying the council rates, and not the tenant, you can claim this as an investment property tax deduction.

Utilities

If you are the one responsible for paying the water, electricity, and/or gas, you can claim these expenses as an investment property tax deduction.

If, however, you require the tenant to pay for the utilities, you can’t claim it as a rental property deduction.

Property Insurance

To protect your property and its contents, rental insurance is a no-brainer and a tax-deductible expense.

Repairs and Maintenance

Provided that the work done on the property maintains it and does not improve it, you can claim this as an investment property tax deduction.

Example:

Maintenance relates to repairing the wear and tear of the building. So, you may need to hire a professional to replace any broken roof tiles.

But if you decide to replace the carpets with wooden floors in a bid to improve the property and consequently increase its value, you can’t claim it against repair and maintenance costs.

Pest Control

Hiring a pest controller to rid rental properties of pests is an expense incurred whilst ensuring that your investment property continues to generate rental income.

So, you can claim a rental property deduction as an immediate investment property tax deduction on your annual return.

Land Tax

If you rent out a property, you may be able to claim land tax as a deduction on your investment property. This means that the amount you pay in land tax each year can often be deducted from your taxable income. However, the rules can vary depending on where your property is located, so it’s important to understand the thresholds and exemptions that apply in your specific state or territory.

Land tax is calculated based on the total taxable value of the land you own. How much you pay can depend on a range of factors, including whether you own the property individually or through a trust, or whether it forms part of a group of properties under a company structure.

There are different types of land tax assessments, such as individual, joint, trust, and company assessments. These are issued on a set schedule each year and may come with specific codes, exemption options, or penalties if not paid on time.

In some cases, corporations are assessed as a group, meaning the land values of related companies are added together to determine the total land tax payable. However, land held in trust is assessed separately and not included in a corporate group’s total.

Each state and territory has its own land tax threshold, which is the minimum property value at which land tax begins to apply. These thresholds and rules can change from year to year and vary widely across jurisdictions.

Because of these differences, it’s a good idea to speak with a tax adviser to make sure you are claiming the right amount in the correct financial year, based on your location and ownership structure.

Tax Advice

Should you decide to make use of a tax advisor to assist you in submitting your land tax claim, these fees are also considered immediately tax-deductible.

Cleaning

If your rental agreement with the tenant includes a weekly cleaning service, for example, this would be an investment property tax deduction.

Similarly, the expense to have the house well cleaned after the tenant vacates the property is tax-deductible.

Gardening Costs

The garden maintenance and replacement of plants and/or garden structures on your investment property is a claimable expense. However, any improvements made to the landscaping that will increase the property’s value will not be claimable under gardening expenses.

Body Corporate Fees

Body corporate fees are a type of expense that property investors can claim as a tax deduction. These fees are paid to the body corporate for the maintenance and upkeep of the property.

For example, if you own a unit in a complex, the body corporate fees you pay for the maintenance of common areas are deductible.

Stationery, Phone, and Internet Costs

Renting out your investment property is similar to managing a business.

Any stationery, phone, and internet usage can be claimed as an investment property tax deduction if they relate to the management of your investment property.

Bank Charges

Any bank fees charged on the loan used to purchase the investment property are tax-deductible.

Accountant Costs

The fact that accounting fees are tax-deductible is a good incentive to have an accountant to manage your tax returns and find ways to maximise your tax return.

4. Capital Gains Tax (CGT)

If you sell your investment property within 12 months of owning it, you need to pay capital gains tax on the profit of that sale. Capital gains tax events can significantly affect your tax liability, as the profit from the sale is added to your taxable income. The main residence exemption can reduce or eliminate capital gains tax if the property sold was your primary home, provided you meet the eligibility criteria and maintain proper documentation.

If, however, you own the house for more than 12 months before selling it, you are eligible for a 50% discount on your CGT. This means you will only need to include half of the capital gain in your tax return. Selling a holiday home, on the other hand, may not qualify for certain tax exemptions, and you must report the capital gains accordingly, impacting your overall tax responsibilities.

Find out more on capital gains tax and how to reduce it, here.

What can’t you claim on an investment property?

According to the ATO, expenses that aren’t considered to be investment property tax deductions include:

• Expenses incurred through the personal use of your investment property
• The repayments of the principal sum borrowed to purchase the investment property
• Solicitor and conveyancer fees for the purchase or sale of the property
• Legal expenses incurred in acquiring a property or defending its title are considered capital in nature and are not immediately deductible. Instead, these costs can be included in the property’s cost base, which is used to calculate capital gains tax when the property is sold
• Other expenses incurred during the purchase or sale of the investment property
• Stamp duty fees charged on the transfer of property into your name
• Travel expenses to carry out the inspection of your rental property yourself used to be claimable but unfortunately no longer can be claimed

Note: ATO allows deductions for certain expenses incurred due to natural disasters, particularly for rental properties or business premises. For instance, if you repair damage caused by a natural disaster, these repair costs can be claimed as deductions, provided they restore the property to its original condition without significant improvements . However, substantial improvements or replacements may need to be claimed over time as capital works deductions. Additionally, some government disaster relief grants are considered non-assessable, non-exempt (NANE) income, meaning they are not taxable and do not need to be included in your tax return .​

Key Takeaways

To maximise your tax return, make sure you use the ATO’s comprehensive list of claimable rental property deductions.

By arming yourself with this knowledge, you will be in the best position to take advantage of all the tax return opportunities available through your investment property.

Remember: you can’t claim any of the listed expenses as investment property tax deductions without proof. Make sure you always keep receipts, invoices, and any other documents relating to the expenditure of your income-generating investment property.

Tax time can feel overwhelming, but with the right tools and a bit of planning, it’s much easier to stay on track and avoid any surprises. Making use of available resources can help take the stress out of the process and keep things running smoothly.