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Insights

What you can (and can't) claim: deductible expenses for residential rental properties

The Australian Taxation Office has described rental property deductions as one of the areas of the tax system most prone to error. The rules are not themselves unusually complex; they sort expenses into three different treatments, and conflating them is the single most common mistake investors make.

(This month's companion Accounting and Taxation article looks at a related mechanic — the four reasons a tax refund can land smaller than expected, including one most people get backwards.)

Three categories, not one

Rental property expenses fall into three groups, and the tax treatment of each is materially different.

The first group can be claimed immediately, in full, in the income year the expense is incurred — provided the property was rented, or genuinely available for rent, at the time. This group includes advertising for tenants, property agent and management fees, body corporate fees, council rates, water and sewerage charges, land tax, landlord insurance, pest control, cleaning and gardening between tenancies, interest on the loan used to acquire or improve the property, legal expenses connected to earning the rental income (such as evicting a tenant or pursuing unpaid rent), and repairs and maintenance that restore the property rather than improve it.

The second group must be claimed over several years rather than in the year they are incurred. This includes capital works — the cost of constructing the building and its structural fixtures — deducted at 2.5 per cent a year over forty years; borrowing expenses over $100, such as loan establishment fees and mortgage registration costs, deducted over five years or the loan term if shorter; and the decline in value of depreciating assets that cost more than $300, such as appliances and carpets, calculated under the usual depreciation rules.

The third group cannot be claimed at all, in any form, at any time.

Repairs versus improvements: where most disputes arise

Within the first group, repairs and maintenance generate the most contested claims, because the distinction between a repair and an improvement is a matter of degree rather than a bright line. A repair restores the property to the condition it was already in — patching a section of roof, repainting a wall, fixing a leaking tap. An improvement goes further — replacing a dated bathroom entirely, adding a new structure, upgrading a facility to a materially better standard. The first is immediately deductible. The second is treated as capital works or a depreciating asset, deducted over years rather than in the year the work is done.

A further, often-missed rule applies to repairs carried out before a property is first rented. These are "initial repairs" — fixing damage that existed at the time of purchase, even if the work happens after settlement — and the ATO treats them as part of the cost of acquiring the property, not as a deductible repair, regardless of how similar the work looks to an ordinary repair carried out later during a tenancy.

What cannot be claimed

Three categories sit outside the deductible universe entirely, and each catches investors who reasonably assume otherwise.

The costs of acquiring or disposing of the property — stamp duty, conveyancing, and real estate agent commission on sale — are not deductible as rental expenses. They instead form part of the property's cost base for capital gains tax purposes, reducing the taxable gain when the property is eventually sold, rather than reducing rental income along the way.

Travel expenses connected with inspecting, maintaining or collecting rent from a residential rental property have not been deductible since 1 July 2017, for any investor other than someone genuinely carrying on the business of letting rental properties. This surprises many investors who recall, correctly, that such travel was deductible before that date. The rule changed; the memory of the old rule has not always kept pace.

Any portion of an expense connected with private use of the property — time spent by the owner or family staying in the property rather than renting it out — must be apportioned out of the claim. The disallowed private portion cannot be claimed under any category.

A development worth tracking, not acting on now

The 2026–27 Federal Budget announced a significant change to how deductible rental expenses interact with an investor's other income. It is important to be precise about what has and has not changed. The expenses described above remain deductible exactly as set out. What is proposed to change, from 1 July 2027 and only for established residential properties purchased after 7:30pm on 12 May 2026, is what a net rental loss — where these deductible expenses exceed rental income — can be offset against. Under the proposed reform, such a loss could no longer reduce an investor's salary or wages, only future rental income or capital gains from residential property. Properties already owned before that date, including those under contract at that time, are proposed to be grandfathered under the current rules indefinitely. This measure has been announced, remains unlegislated, and the detail may change before it passes. Investors should treat it as a live development to monitor, not as a reason to act ahead of the legislation.

The principle

Rental property deductions are not complicated in principle. They are complicated in application: the correct treatment of any given expense depends on timing (before or during the tenancy) and on degree (repair or improvement). The disciplined investor keeps records that make this distinction easy to apply at tax time: dated invoices, a brief note of what each item of work actually involved, and a depreciation schedule prepared by a quantity surveyor where capital works or depreciating assets are material.

Cost and tax are the certainties of investment. For a rental property, knowing which category each expense falls into — before the work is done, not after the return is prepared — is the mechanic worth understanding in advance.

If you would like to review the deductions you are claiming against a rental property, or how a planned renovation or purchase would be treated, we welcome the conversation.

Corinne Kirk
Partner, Accountant

1300 102 542 | 0405 106 401
corinne@egu.au

Sources

This is general advice. It does not take account of your objectives, financial situation, or needs, and is not a substitute for advice that does. Before acting on anything in it, consider whether it suits your circumstances, and consider the relevant Product Disclosure Statement.

Corinne Kirk