Claiming a deduction for rental expenses
Media: When can I claim a deduction for rental expenses?
https://tv.ato.gov.au/ato-tv/media?v=bd1bdiun85itedExternal Link (Duration: 3:07)
Rental expense categories
There are 3 rental expense categories, those for which you:
- can claim a deduction now (in the income year you incur the expense) – for example, interest on loans, council rates, repairs and maintenance and depreciating assets costing $300 or less
- can claim a deduction over several years – for example, capital works, borrowing expenses and the decline in value of depreciating assets that cost more than $300
- can't claim a deduction – for example, personal expenses, including expenses arising from your personal use of the property, some expenses of a capital nature and the purchase of second-hand (or used) depreciating assets after 9 May 2017.
You can claim expenditure such as interest on loans, local council, water and sewerage rates, land taxes and emergency service levies you incur prior to using it provided you are holding it to produce assessable rental income. Evidence of your holding the property to produce rental income, such as communications with real estate agents or rental managers, must be kept. You won't be holding the property to produce rental income if you have decided not to rent it out – for example, if you decide to use the property for private purposes.
If the land is vacant under the vacant land provisions, you generally can't claim deductions for expenses incurred in holding land before the property can be occupied and held to produce assessable rental income.
If your rental property is used as a holiday home, you may not be able to claim your ownership and use expenses. For more information, see Holiday homes.
It is important to claim each expense under the correct expense type to make sure you treat it correctly for tax purposes.
Claim the right amount of expenses – methods of apportionment
You will need to work out the amount of the expense that relates to your income-producing activities (apportion your expenses), if any of the following apply:
- your property is only held to produce assessble rental income for part of the year
- your property is treated as vacant land for part of the year
- you use your property for private or personal purposes for part of the year
- your property is your holiday home
- you only use part of your property to earn rent
- you rent your property at less than market rates (non-commercial rates)
- you use your investment loan for private purposes.
If your property is your holiday home, you can't claim deductions for ownership and use of the property unless it is used (or held for use) mainly to produce rental income.
If you co-own your rental property with someone, rental income and expenses must be attributed to each co-owner according to your legal interest in the property.
Expenses, other than those that aren't allowable because your property is a holiday home, need to be apportioned on a fair and reasonable basis if your rental property is used for more than one purpose during the income year. For example, if your rental property is used, or held to, produce assessable income and you also use it for private purposes, your expenses will need to be apportioned.
What is fair and reasonable usually depends on the:
- period of time the property was rented (time-based method)
- area of the property rented (area-based method).
You may need to use a combination of the time-based apportionment and the area-based method if you rented out part of your property for part (or parts) of the income year.
Your expenses may also need to be apportioned if you charge rent which is less than the market value. If the rent is assessable, it's considered fair and reasonable in these circumstances to apportion for your private and domestic use of the property by limiting the deductible rental expenses to the amount of the rental income you receive. For more information on how to apportion deductions when you charge less than market rates for rent, see Other methods.
If the rent isn't assessable, no expenses will be allowed as deductions. For more information on when rent will and won't be assessable, see Rental income you must declare.
You don't need to apportion expenses that relate solely to renting out the property, such as advertising for tenants and real estate commissions. These are fully deductible in the year they are incurred.
Time-based method
To work out your rental property deductions for periods when you used (or held) the property to earn assessable rental income using the time-based method, use the following formula:
[(days used to produce income + days held to produce income) ÷ number of days in the income year you owned the property] × expenses
Where:
The 'days used to produce income' is the number of days your property is occupied for rent, which includes days for which rent is paid even if the property is not physically occupied.
The 'days held to produce income' is the number of days your property is unoccupied but available for rent on commercial terms.
If you rent out a room in your home, your property won't be available for rent on commercial terms on days when the room is unoccupied during the income year. This means your 'days held to produce income' will be zero and only those days where the room is rented will be taken into account.
When there is a clear change in the use of your rental property during the income year, for example, when your property starts or stops being used as a rental, the time-based method can be used to apportion your expenses.
The change of use must be definite and will be determined based on the actual use of the property. The use of a rental property doesn't change due to fluctuations in the use of the property due to seasonal patterns, such as a ski lodge or a beach house.
Example: change in use of rental property
Sunita owns a property in Geraldton which she has rented out as a long-term rental for 8 years. After she retires, Sunita decides to move into the Geraldton property.
The tenants move out on 1 March and Sunita moves into the property a couple of weeks later. From 2 March, the property is used by Sunita for private purposes.
During the income year (which is not a leap year), Sunita incurs:
- interest expenses and rates expenses of $21,596
- repair expenses (which relate solely to damage caused by the tenant) of $951
- real estate commission expenses of $1,664.
Sunita can claim a deduction of $1,664 for the real estate commission expenses and a deduction of $951 for the repair expenses. These expenses don't need to be apportioned because they relate solely to the period she rented the property out.
Sunita must apportion the other expenses because the property stopped being a rental part way through the income year. Sunita calculates the number of days the property was used to produce income as 245 days (period from 1 July to 2 March).
Using the time-based method, Sunita calculates her interest, rates and repair expenses as:
245 days ÷ 365 days × $21,596 = $14,496
The total deductions Sunita can claim for the income year is $17,111 ($14,496 + $951 + $1,664).
End of example
Example: apportionment for private use and days not held to produce income
Daniel and Kate are both chefs. They own a cottage in an area that is popular with summer holidaymakers but has limited rental potential during the colder seasons.
In October, Daniel and Kate move into their cottage so they can work at a nearby restaurant. Their contracts are for 6 months from October to March the following year.
Apart from living in the cottage for 6 months to work in the area, Daniel and Kate don’t use it. As the cottage hasn't been used by Daniel and Kate for their holidays and recreation (or the holidays and recreation of their family and friends), the cottage isn't their holiday home.
When they are not living in the house, Daniel and Kate occasionally rent the property to itinerant workers based on word of mouth only. Daniel and Kate only rent the house out for 14 days of the year.
The property isn't held to produce income during the periods the property is unoccupied because it isn't actively advertised or managed as a rental property during that time.
During the income year, Daniel and Kate receive rent of $1,852 and incur interest expenses, electricity, council rates and water rates of $16,894 for the cottage.
Daniel and Kate apportion their interest expenses, electricity, council and water rates on a time basis, using the days the cottage was used to produce income (14 days out of 365 days) and calculate them as follows:
14 days ÷ 365 days × $16,894 = $648
Daniel and Kate's total rental deductions will be $648.
As they own the property jointly, Daneil and Kate will each declare 50% of the rental income (50% × $1,852 = $926) and claim 50% of the rental expense as a deduction ($648 × 50% = $324).
End of example
Example: apportionment for private use of holiday home used (or held to use) mainly to produce rental income
Gail and Craig jointly own a rental property which they also use as a holiday home. They advertise the property for rent through a real estate agent. The rental terms, including the amount of rent, for the property are similar to comparable properties in the area. Gail and Craig have instructed the real estate agent to actively monitor requests for bookings so they can maximise occupancy for the property.
Gail and Craig use the property themselves for 30 days during the year when it isn't rented and in a period when it is unlikely to be rented.
Gail and Craig's holiday home is used (or held for use) mainly to produce rental income because they maximise occupancy and rental income by getting their real estate agent to actively monitor requests and by not blocking it out for their personal use. Also, when they do use it, it is during periods when the property isn't already rented and is unlikely to be rented.
Excluding the 30 days Gail and Craig use it, it is rented or held for rent for 335 days during the income year.
During the year, Gail and Craig's expenses for the property are $36,628. This includes:
- $1,828 for the agent's commission and the cost of advertising for tenants
- interest on the funds borrowed to purchase the property
- insurance
- maintenance costs
- council rates
- the decline in value of depreciating assets and capital works deductions.
Gail and Craig claim the full $1,828 as a deduction for the agent's commission and costs of advertising for tenants. They can also claim deductions for their other expenses ($34,800) using the time-based method. Gail and Craig will need to apportion their deduction for the year (which is not a leap year) as follows:
335 ÷ 365 × $34,800 = $31,940
Gail and Craig can rental deductions of $33,768 ($31,940 + $1,828). However, as they own the property jointly, Gail and Craig will each be entitled to claim rental deductions of $16,884 ($33,768 x 50%).
End of exampleArea-based method
If you rent out part of your property (for example, the lower floor of a 2-floor property or a bedroom in your home) you need to work out your expenses using the area-based method. You must also apportion your expenses using the time-based method if you only rented that separate part of your property for part of the year.
The formula for apportioning expenses using the area-based method is:
[A + (B ÷ 2) ÷ C] × expenses incurred
Where:
- A is the floor area of the property solely occupied by the tenant
- B is the floor area of the common areas
- C is the floor area of the whole property.
Example: apportionment using area-based method
Kim owns a 2-storey townhouse and rents out the bottom floor to a long-term tenant. They each have exclusive possession of their floor. They share the use of the gardens around the house.
The top floor has a large deck and is 55 square metres, the bottom floor is 45 square metres, and the gardens are 35 square metres. The total property is 135 square metres (55 + 45 + 35 = 135).
Kim would work out her apportionment percentage using the area-based method as follows:
[45 square metres + (35 square metres ÷ 2)] ÷ 135 square metres = 0.4629
0.4629 x 100 = 46.3%.
Kim can claim 46.3% of the allowable expenses she incurs related to the property as a deduction.
End of example
Example: apportionment using area-based method and time-based method
Leanne has a 2-bedroom, 2-bathroom unit in a high-rise apartment. Leanne lives alone and mainly uses the master bedroom and ensuite bathroom. The second bedroom and main bathroom is accessible from the common areas of the unit including the lounge, kitchen and balcony and are mainly used by visitors.
Part way through the year, Leanne decides to let out the second bedroom using a sharing economy platform to earn extra income. She actively monitors replies from the listing and doesn't refuse guests when the room is available. Leanne rents the second bedroom of her property for 100 days during the income year.
The unit is 80 square metres in total. The second bedroom being let is 10 square metres. Leanne also gives paying guests access to common areas including the main bathroom, kitchen, lounge and balcony, which totals 50 square metres and allows guests access to her wi-fi for free if they wish to.
For the period guests are staying and have access to the common areas (along with Leanne), Leanne can claim 50% of the deductible portion of associated costs related to the common areas.
During the income year, Leanne incurs interest expenses, rates, body corporate fees, capital works deductions, electricity and internet expenses for the property of $26,153 and sharing platform commission fees of $425.
To apportion her expenses and work out how much she can claim as a deduction, Leanne must use the area-based method. Leanne must also use the time-based method, because she only rented her second bedroom for 100 days during the income year.
Even if Leanne had the room listed for rent for the whole income year, the days it was unoccupied wouldn't be treated as days held to produce income. This is because when the room is not being rented out, it is treated as being used privately by Leanne as part of her home. Therefore, the number of days held to produce income will be zero.
Step 1 – apply the area-based method
Leanne works out the percentage of the house her guests have access to when they are there using the area-based method as follows:
10 square metres + (50 square metres ÷ 2) ÷ 80 square metres = 0.4375
0.4375 × 100 = 43.75%
Step 2 – apply the time-based method
Leanne lets out the spare bedroom of her property, being her home, for 100 days of the year (which is not a leap year). As she has rented the bedroom out for only part of the income year, she will also need to apportion her deductible expenses using the time-based method. Leanne uses the following formula:
100 days used to produce income ÷ 365 days = 0.27397
0.27397 × 100 = 27.4%
By multiplying the time-based method and area-based method together, Leanne will be able to work out what percentage of her yearly expenses are deductible.
43.75% × 27.4% = 11.99%
Leanne can claim a deduction for 11.99% of her interest expenses, rates, body corporate fees, capital works deductions, electricity and internet expenses ($26,153 x 11.99% = $3,136). Leanne can also claim 100% of the expenses associated solely with renting out the second bedroom, that is, the sharing economy platform's service fees or commission ($425).
For the income year, Leanne can claim a deduction for rental expenses of $3,561 ($3,136 + $425).
End of example
Other methods
If you are renting your property to family or friends and not charging rent at a market rate, it is likely that your property has a mixed use, these uses are:
- producing assessable rental income
- a private or domestic use of providing accommodation for your family and friends.
In these circumstances, your deductions must be apportioned to exclude the amount related to the private or domestic use of the property. Where the expenses you incur that would otherwise be deductible exceed the amount of rent you receive, a fair and reasonable way to apportion your expenses is to limit them to the amount of rental income derived from the property. This will result in no net rental income or loss.
Example: rent below market rate to family
Jana rents a property she owns to her mother for her to live in. Although Jana's mother has signed a standard lease agreement, Jana has set the rent at a below market rates.
Jana provides the discount for private or domestic reasons to assist her mother who can't afford to pay rent at the market rate.
During the income year Jana receives rent of $15,600 from her mother and she incurs rental expenses, including mortgage interest expenses, insurance, council and water rates and capital works of $20,578.
The rent that Jana receives from her mother ($15,600) is assessable rental income. As Jana's deductible expenses exceed the amount of rent Jana receives, she limits her deductions related to property for mortgage interest, insurance capital works, council and water rates to the amount of rent received from her mother ($15,600).
Jana has no net rental income or loss.
End of example
If you rent your property to family and friends at the market rate of rent, you don't need to apportion your expenses.
To establish that the property has been rented at a market rate, you will need to provide evidence to show how the market rate was calculated at the time the rent amount was set. For example, a real estate rent valuation or listings for similar properties available in the area the property is located at the same time your property was available for rent.
For more information, see:
- TR 2026/1 Income tax: rental property income and deductions for individuals who are not in business
- PCG 2026/2 Apportionment of rental property deductions – ATO compliance approach
- PCG 2026/3 Application of section 26-50 of the Income Tax Assessment Act 1997 to holiday homes that you also rent out – ATO compliance approach.
Positive or negative gearing
Your rental property is:
- positively geared if your deductible expenses are less than the income you earn from the property – you make a profit from renting out your property.
- negatively geared if your deductible expenses are more than the income you earn from the property. You can claim deductions for rental expenses against your rental and other income – such as salary, wages or business income. If your other income isn’t enough to absorb the loss, you can carry forward your loss to the next income year. For more information on the changes to negative gearing announced in the 2026–27 Federal Budget, see Tax reform – Boosting home ownership – Reforming negative gearing and capital gains tax.
Expenses you can’t claim
You can’t claim a deduction for:
- expenses not actually paid by you, such as water or electricity charges paid by your tenants
- acquisition and disposal costs, including the purchase cost, conveyancing and advertising costs (instead, these are usually included in the property's cost base, which would reduce any capital gains tax when you sell the property)
- decline in value of second hand depreciating assets
- ownership or use expenses for a holiday home that isn't used (or held for use) mainly to produce rental income
- GST credits for anything you purchase to lease the premises – GST doesn't apply to residential rental properties, however, when claiming the expense as a deduction, you claim the total amount you've paid (inclusive of GST, if applicable).
Find out about other expenses you can’t claim below.
Deductions for vacant land
In most cases, you can’t claim a deduction for the cost of holding vacant land. For more information, see Deductions for vacant land.
Supplier ABNs
When you hire a contractor for services and repairs connected with your rental property, you will need to check they have an Australian business number (ABN). If they don't provide you with their ABN, you may have to withhold 47% from the payment you make to them and transfer that withheld amount to us.
You may not be able to claim deductions for these expenses if you don't withhold when you were required to.
How to include rental expenses in your tax return
If you lodge your own tax return using myTax, you need to select:
- 'You had Australian interest, or other Australian income or losses from investments or property'
- 'Other foreign income' for overseas property.
Once you have completed the rental property details and the related income fields, you can add your expenses in the 'Rental expenses' fields.
Including rental income and expenses in myTax
Media: How to include rental income and expenses in myTax
https://tv.ato.gov.au/ato-tv/media?v=bd1bdiubtjsfhwExternal Link (Duration: 1:56)