Key takeaways:
Rental income is generally taxable. Rental income is added to your assessable income and taxed at your marginal tax rate.
Investment property tax deductions may reduce your taxable income. Common deductions include loan interest, depreciation, repairs, strata fees, council rates and property management costs.
Negative and positive gearing affect cash flow and tax outcomes. Negative gearing may create a deductible loss, while positive gearing can generate taxable rental profit.
Capital gains tax may apply when you sell an investment property. Eligible investors may currently receive a 50% CGT discount after owning a property for more than 12 months.
Accurate record-keeping can help support tax claims. Keep invoices, receipts and depreciation schedules to make tax time easier.
Property investment can provide rental income and potential long-term capital growth, but it also comes with tax obligations.
If you own an investment property or are considering buying one, it's important to understand how rental income is taxed, which expenses may be deductible, and how rules such as negative gearing and capital gains tax (CGT) can affect your overall investment returns.
Understanding investment property tax can help you make more informed decisions, manage your cash flow and avoid unexpected tax outcomes.
This guide explains how tax works on investment properties, including rental income, tax deductions, negative and positive gearing, depreciation and the tax implications of selling an investment property.
How is rental income taxed?
The Australian Taxation Office (ATO) treats rental income as part of your assessable income, which means it is generally taxed at your marginal tax rate for the relevant financial year.
If your investment property is negatively geared, you may be able to claim the resulting loss as a tax deduction, subject to ATO rules and your individual circumstances.
We'll explain the difference between negative and positive gearing in the next section.
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What is the difference between positive and negative gearing?
Positive and negative gearing affect both the cash flow from your investment property and the amount of tax you may pay.
What is positive gearing?
Positive gearing occurs when your rental income exceeds the costs of owning and managing the property, including expenses such as loan interest, council rates, insurance and maintenance.
For example, if a property generates $35,000 in annual rental income and has $30,000 in deductible expenses, it would produce a positive cash flow of $5,000.
Some investors prefer positively geared properties because they could generate income from the outset rather than relying on future capital growth.
A positively geared property may provide:
Additional income to supplement your regular earnings
Greater flexibility to invest, save or meet household expenses
Extra funds to help reduce debt
Improved cash flow to manage unexpected costs
A potential source of income in retirement
However, positive gearing can also increase your taxable income. Any net rental profit is generally added to your assessable income and taxed at your marginal tax rate.
Whether positive gearing suits your goals will depend on factors such as your income, investment strategy and long-term objectives. Tax outcomes vary based on individual circumstances, so consider seeking professional advice before making investment decisions.
What is negative gearing?
Negative gearing occurs when the expenses associated with an investment property exceed the rental income it generates.
For example, if you receive $30,000 in annual rental income and have $35,000 in deductible expenses, you may make a rental loss of $5,000. Under current tax rules, that loss can be offset against other assessable income, such as salary or wages, which may reduce your tax liability.
Some investors choose negatively geared properties because they expect long-term capital growth to outweigh short-term cash flow losses. However, this strategy depends on your ability to fund the ongoing shortfall and does not guarantee future investment returns.
Important: Proposed changes to negative gearing
The Federal Government announced proposed changes to negative gearing and capital gains tax (CGT) arrangements as part of the 2026–27 Federal Budget. At the time of writing, these changes have not been legislated and are subject to Parliamentary approval.
If passed, the proposed reforms would apply from 1 July 2027 and would:
Continue to allow negative gearing for residential investment properties held before 7:30 PM AEST on 12 May 2026
Restrict negative gearing for most new residential property investments to new builds purchased after the changes commence
Grandfather existing investments, meaning properties held before the announcement would generally not be affected
As these changes could affect future investment decisions, it's important to understand both the current rules and any legislative developments before purchasing an investment property.
Negative gearing may reduce taxable income under current rules, but investors still need sufficient income or savings to cover any cash flow shortfall and the cost of holding an investment property. Before investing, consider:
Your ability to manage periods of negative cash flow
Your long-term investment goals
Potential changes to tax legislation
Expected rental demand and growth prospects
Interest rate movements and other ownership costs
Tax outcomes depend on your individual circumstances. Given the complexity of property investment taxation and the proposed reforms, consider seeking independent taxation, financial and legal advice before making any investment decisions.
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What is capital gains tax (CGT)?
Capital gains tax (CGT) is the tax you may pay when you make a profit from selling an asset, including an investment property.
If you sell an investment property for more than its cost base, the profit may be treated as a capital gain. That gain is generally added to your assessable income and taxed at your marginal tax rate.
CGT commonly applies when you sell an investment property for a profit.
Owner-occupied homes may be eligible for the main residence exemption, which can reduce or eliminate CGT. However, eligibility depends on your circumstances, particularly if the property has been used to generate income.
If you sell an investment property at a loss, you generally won't pay CGT. Instead, the capital loss can usually be used to offset capital gains in the current or future financial years. Capital losses generally can't be used to reduce other income, such as salary or wages.
The current CGT discount
Under current rules, individuals who hold an investment property for more than 12 months may be eligible for a 50% CGT discount. This means only half of the capital gain is generally included in assessable income. For example:
Scenario | Amount |
|---|---|
Capital gain on sale | $100,000 |
CGT discount | 50% |
Taxable capital gain | $50,000 |
The discounted gain is then taxed at your marginal tax rate.
Important: Proposed changes to CGT
As part of the 2026–27 Federal Budget, the Federal Government announced proposed changes to capital gains tax arrangements. At the time of writing, these changes have not been legislated and remain before Parliament. If passed, from 1 July 2027:
The current 50% CGT discount for individuals, trusts and partnerships would be replaced
A cost-base indexation method would apply to eligible capital gains
A 30% minimum tax rate on capital gains would be introduced
The reforms would apply only to gains accrued after 1 July 2027
Because these proposed changes could affect the after-tax return on future property investments, investors should stay informed as the legislation progresses.
Why CGT matters for property investors
Understanding how capital gains are calculated, what exemptions or discounts may apply and how proposed reforms could affect future investments can help you make more informed decisions when buying, holding and selling property.
Tax outcomes vary depending on your circumstances, ownership structure and how the property has been used. Consider seeking independent tax, financial and legal advice before making investment decisions or acting on potential CGT outcomes.
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What tax deductions can you claim on an investment property?
Property investors may be able to claim tax deductions for a range of expenses associated with owning and managing a rental property.
Eligibility depends on your circumstances and the nature of the expense, so it's important to check current ATO requirements before making a claim.
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Some common examples include:
1. Interest on your investment property loan
Interest on an investment property loan is often one of the largest tax deductions available to property investors. In general, you may be able to claim interest on money borrowed to buy, renovate or maintain an income-producing property. The deduction is typically claimed in the financial year the interest expense is incurred.
The loan must relate to the property's income-producing purpose. If part of the loan has been used for private expenses, the interest may need to be apportioned.
In addition to loan interest, investors may be able to claim certain ongoing loan costs, including:
Loan maintenance fees
Offset account fees
Redraw facility fees
Other eligible borrowing and loan administration costs
Keeping accurate records can help support your claims at tax time.
What about interest-only loans?
For interest-only investment loans, the interest component of repayments is generally deductible, provided the loan is used for income-producing purposes. Because interest-only loans do not reduce the principal balance during the interest-only period, it's important to consider both the tax implications and the loan's long-term cost.
Claiming interest could help reduce your taxable income, but it doesn't remove the cost of borrowing. That's why it can still be worth reviewing your loan and comparing rates.
2. Repairs and maintenance
Repairs and maintenance are common rental property expenses and, in many cases, may be tax-deductible. However, the ATO treats repairs, maintenance and improvements differently. Understanding the distinction can help ensure expenses are claimed correctly.
What counts as a repair?
A repair restores an existing item to its original condition after damage or wear and tear. Examples include repairing a broken fence, replacing damaged roof tiles, or fixing a leaking tap.
Repairs are generally deductible in the financial year in which the expense is incurred, provided the property is used to generate rental income.
What counts as an improvement?
An improvement enhances an asset beyond its original condition. For example, replacing a damaged timber fence with a steel fence would generally be considered an improvement rather than a repair. Improvements are not usually immediately deductible. Instead, they may be claimed over time through:
Capital works deductions for eligible structural improvements, often at 2.5% per year
Depreciation deductions for eligible fixtures, fittings and equipment
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What is maintenance?
Maintenance refers to routine work that helps preserve a property's condition and prevent deterioration. Examples include:
Lawn mowing and gardening
Servicing air-conditioning systems
Cleaning gutters
Minor plumbing work
General upkeep to keep the property tenantable
Maintenance expenses are generally deductible in the financial year they are incurred.
Why is this distinction crucial?
The way an expense is classified can affect when and how you claim a deduction.
Expense type | Typical tax treatment |
|---|---|
Repair | Immediate deduction |
Maintenance | Immediate deduction |
Improvement | Claimed over time through capital works or depreciation |
Because property expenses do not always fit neatly into one category, keeping detailed records and invoices can help support your claims and make tax time easier.
3. Depreciation of building structures and assets
Depreciation allows property investors to claim deductions for the decline in value of certain building components and assets used in a rental property.
Unlike interest or repairs, depreciation is generally claimed over time rather than as an immediate deduction. For many investors, depreciation may represent a significant deduction because it can be claimed on eligible assets that decline in value over time.
Depreciation deductions generally fall into two categories.
Capital works deductions
Capital works relate to the building structure and eligible structural improvements, such as building construction costs, extensions and additions, kitchen and bathroom renovations, fencing, retaining walls and permanent landscaping works.
Eligible capital works are generally claimed over several years at prescribed rates.
Depreciating assets
Depreciating assets are items within the property that have a limited effective life and decline in value over time. Examples include air conditioners, hot water systems, ovens and cooktops, carpets, blinds and ceiling fans.
These assets are generally claimed over their effective life in line with ATO rules.
Why is a depreciation schedule important?
Depreciation calculations can be complex, which is why many investors engage a qualified Quantity Surveyor to prepare a tax depreciation schedule.
A depreciation schedule outlines the deductions that may be available over the life of the property and can help ensure eligible claims are not overlooked.
Can you claim depreciation on improvements?
In many cases, yes.
Improvements that increase a property's value, functionality or desirability may be claimable over time through capital works deductions or depreciation rules, depending on the type of improvement. Examples include:
Installing new appliances
Renovating a kitchen or bathroom
Adding an extension
Upgrading fencing
Landscaping outdoor areas
What about improvements made by previous owners?
The rules here can be complex.
Certain capital works completed by previous owners may still be eligible for capital works deductions. However, different rules apply to second-hand depreciating assets.
For properties purchased after 9 May 2017, investors generally cannot claim depreciation on previously used depreciating assets, such as existing carpets, appliances, blinds or air-conditioning units installed by a previous owner.
Because eligibility depends on the type of asset, the property's purchase date and its ownership history, it's worth speaking with a qualified tax adviser or Quantity Surveyor to understand what deductions may apply to your investment property.
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4. Advertising for tenants
Finding tenants often involves upfront costs, and some of these expenses may be tax-deductible. Common examples include:
Property management and leasing fees
Professional photography
Online rental listings and advertising
Other marketing costs directly related to securing tenants
As with all rental property deductions, eligibility depends on your circumstances and the nature of the expense.
5. Strata fees, council rates and utility bills
Owning an investment property involves ongoing costs beyond loan repayments. Some of these expenses may be tax-deductible when they relate to earning rental income. Common examples include strata fees, council rates and certain utility charges paid by the property owner.
Strata and body corporate fees
If your investment property is part of a strata scheme, such as an apartment, unit or townhouse complex, you may be able to claim strata or body corporate fees. These fees typically cover the maintenance and management of common property and shared facilities, including:
Building insurance
Gardening and landscaping
Cleaning and maintenance of common areas
Building management services
Shared facilities such as pools, gyms and lifts
Council rates
Council rates are deductible when the property is available for rent or generating rental income. They are a common ongoing expense and help fund local infrastructure and community services.
Utility bills and service charges
You may also be able to claim certain utility and service costs, including:
Water charges
Electricity costs
Gas charges
Other eligible service fees
These expenses are generally only deductible if you pay them as the property owner. If a tenant pays the cost directly or reimburses you, you typically can't claim a deduction.
Strata levies, council rates and utility bills can add up over the course of a financial year. Keeping accurate records can help you track expenses and support any deductions you claim at tax time.
6. Other tax deductions
Depending on your circumstances, there may be other rental property expenses that are tax-deductible. Common examples include:
Property management fees
Real estate agent fees
Some legal expenses related to managing a tenancy
Land tax
Administrative and record-keeping costs
Property management and agent fees
If you use a property manager, the fees you pay are generally deductible. This may include fees for ongoing management, tenant sourcing and leasing, advertising and routine inspection. These expenses are generally claimable in the financial year they are incurred.
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Land tax
Land tax is generally deductible when it relates to an income-producing property. The rules, thresholds and rates vary between states and territories, so the amount payable will depend on the property's location and your overall landholdings.
Pest control and maintenance services
Expenses incurred to maintain and protect a rental property may also be deductible. Examples are pest inspections and treatments, termite management and general maintenance services. These can help preserve the property's condition and support its ongoing use as a rental investment.
Administrative expenses
If you self-manage your property, you may incur costs associated with record-keeping and tenant management. Examples include postage, printing and photocopying, record-keeping supplies and other reasonable administration expenses.
What expenses can't you claim?
Not every cost associated with owning a rental property is tax-deductible. Examples of non-deductible expenses generally include:
Personal expenses
Costs relating to private use of the property
Capital expenses that must be claimed over time rather than immediately
Depreciation on certain second-hand depreciating assets acquired after 9 May 2017
Travel expenses incurred to inspect, maintain or collect rent from a residential rental property
If you're unsure whether an expense is deductible, consider seeking advice from a registered tax professional before lodging your tax return.
Can you claim tax deductions when your investment property is vacant?
Whether you can claim rental property deductions while a property is vacant depends on why it is empty. If the property is vacant by choice and not genuinely available for rent, you generally can't claim the usual rental property deductions.
However, it's still important to keep records of property-related expenses, as some costs may form part of the property's cost base and potentially affect your CGT position when you sell.
If the property is temporarily vacant while you are actively seeking tenants, you may still be able to claim eligible deductions.
The ATO may require evidence that the property was genuinely available for rent, such as:
Online rental listings
Advertisements for tenants
Correspondence with a real estate agent or property manager
Records showing reasonable efforts to secure tenants
Keeping clear records can help support your claims if the ATO requests them.
What investment property tax means for your returns
Investment property tax involves more than declaring rental income at tax time. Understanding deductions, depreciation, gearing strategies and capital gains tax can help you better manage cash flow and assess the true performance of your investment.
Because tax outcomes depend on your individual circumstances and tax laws can change, it's important to seek independent taxation, financial and legal advice before making decisions.
If you're considering buying an investment property or reviewing your current strategy, an Aussie Broker can help you understand your borrowing options and compare loans that suit your goals.
