Rental expenses

Types of rental expenses

You can claim a deduction for certain expenses that relate to a rental property you own if the expenses are incurred in gaining or producing your assessable rental income. You can't claim expenses of a capital or private nature; however you may be able to either:

• claim a deduction for the decline in value of certain capital (depreciating) assets
• claim a deduction for the cost of constructing capital works on a building or structural improvement
• include certain capital costs in the cost base of the property for CGT purposes.

There are 3 categories of rental expenses, those for which you:

• can't claim deductions
• can claim an immediate deduction in the income year you incur the expense
• can claim deductions over several income years.

Always check your supplier's ABN

If you pay a contractor for services on your rental property, you need to check that they have an Australian business number (ABN). If they don't provide you with an ABN, you may need to withhold 47% of that payment and pay it to us. For details of when to withhold, see Withholding from suppliers. You'll need to register for a withholding account, if you don't have one.

If you don't withhold from payments to a contractor where they don't provide you with an ABN, you may not be able to claim a deduction for those expenses.

For more information, see Removing tax deductibility of non-compliant payments.

Expenses for which you can't claim deductions

You can't claim deductions for expenses:

• you don't incur, such as water or electricity usage charges borne by your tenants
• where your property (including your holiday home) wasn't rented or available for rent on commercial terms
• that relate to the ownership or use of your holiday home that isn't used or held for use mainly to produce rental income
• that don't relate to the rental of a property, for example:
  • expenses you incur for your own use of your holiday home that is used or held for use mainly to produce rental income, see How to claim rental expenses
  • costs of maintaining a non-income producing property used as collateral for the investment loan
• that relate to holding vacant land
• that relate to the cost of certain second-hand depreciating assets
• that relate to acquisition and disposal costs of the property
• that relate to travel expenses to inspect a property before you buy it and, in certain circumstances, when you own the property
• you incur in relocating assets between rental properties before renting
• for rental seminars about helping you find a rental property to invest in.

Travel expenses

Travel expenses include the costs of:

• travel to inspect, maintain or collect rent for the property
• meals and accommodation that relate to that travel.

You can't claim a deduction for travel expenses that relate to your residential rental property, unless you're either:

• using the property in carrying on a business (including a business of letting rental properties)
• an excluded entity.

If your travel expenses also relate to another income producing activity, you'll need to apportion the expenses. For more information, see Apportionment of travel expenses.

Certain second-hand depreciating assets

You can't claim a deduction for a decline in value of certain second-hand depreciating assets against your residential rental property income unless you're either:

• using the property in carrying on a business (including a business of letting rental properties)
• an excluded entity.

For more information, see Limit on deductions for decline in value of second-hand depreciating assets.

For more information, see:

• Travel and car expenses
• Rental expenses to claim
• Rental properties and travel expenses

Acquisition and disposal costs

You can't claim a deduction for the costs of acquiring or disposing of your rental property, such as:

• purchase price of the property
• fees on bank guarantees in lieu of deposits
• conveyancing costs
• advertising expenses
• fees of a buyer’s agent you engage to find you a suitable rental property to purchase, including where the agent recommends a property manager free of charge as an optional or supplementary service
• stamp duty on the transfer of the property (but not stamp duty on a lease of property, see Lease document expenses).

However, these costs may form part of the cost base of the property for CGT purposes.

For more information, see Guide to capital gains tax 2026.

Ownership and use expenses for your holiday home

What is a holiday home?

A holiday home is a property that is used (or held for use) for either:

• your holidays or recreation
• the holidays or recreation of your family members and friends either for no rent or at a reduced rate.

For these purposes, 'holiday' means a period of cessation from work, or of recreation, a vacation. 'Recreation' includes amusement, sport or similar leisure-time activities.

 

Ownership and use expenses

You can claim a deduction for ownership and use expenses for your holiday home only if it's used or held for use mainly to produce rental income.

If your holiday home isn't mainly used (or held for use) to produce rental income, you can't claim any deductions for ownership or use expenses.

Ownership and use expenses (for a holiday home) are costs you incur:

• to acquire ownership or the rights to use it
• to retain ownership or rights to use it
• to use, operate, maintain, or repair it
• in relation to any obligation associated with your ownership or your rights to use it.

Common examples of ownership and use expenses for a holiday home include:

• interest on money borrowed to finance the purchase of the property
• borrowing expenses
• council rates
• water rates
• body corporate fees
• land tax
• repairs and maintenance.

Ownership and use expenses don't include the booking fees, advertising fees and cleaning fees you incur when your holiday home is rented out.

Expenses that are not ownership or use expenses are deductible to the extent they are incurred in gaining or producing your assessable income.

Used or held for use mainly to produce rental income

Using or holding your holiday home for use mainly to produce rental income means that it is chiefly, principally or for the most part used for that purpose.

A simple analysis of the times during an income year that your holiday home is used (or held for use) for rental purposes, compared to other uses is not enough to establish that it is used (or held for use) mainly to produce assessable income.

What you intend to mainly use your holiday home for does not determine its main use.

Just advertising your holiday home for rent at times when it is not used by you does not mean that it is used (or held for use) mainly to produce assessable income.

Whether you use your holiday home (or hold it for use) mainly to produce assessable income will be determined objectively based on a number of factors including the:

• time your holiday home is dedicated to income-producing use
• pattern of how you use or hold your holiday home for your holidays and recreation (or the holidays or recreation of your family members and friends for no rent or at a reduced rate)
• use or availability of your holiday home during times when it is desirable as a holiday destination, such as during school holidays, public holidays, or peak seasonal demand periods

No single factor on its own will determine if your holiday home is used, or held for use, mainly to produce assessable income. All circumstances, including the degree, extent and prioritisation of the uses will be considered. The question is one of fact and degree.

Peak seasonal demand for your holiday home will vary according to its location and when it is desirable as a destination for holidays or recreation. For example, a property in a coastal or resort area may experience peak demand during the summer season, while a property near a ski field may have peak demand in winter. For a holiday home located in the central business district of a capital city, peak demand may instead be influenced by major events such as sporting fixtures or festivals.

You should consider the location-specific seasonal demand characteristics of your holiday home, including when peak demand would ordinarily be expected.

You should be able to objectively explain why the use of your holiday home (including holding it for use) for your holidays or recreation (or for your family members or friends for no rent or at a reduced rate), does not detract from it being used (or held) mainly to derive assessable rental income.

You may be able to add any ownership and use expenses that you can't deduct to the cost base or reduced cost base of the holiday home to work out the CGT consequences when it is sold.

 

 

 

 

 

 

For more information on holiday homes and how to apportion deductions for holiday homes, see:

• Holiday homes
• How to claim rental deductions
• Taxation Ruling TR 2026/1 Income tax: rental property income and deductions for individuals who are not in business
• Practical Compliance Guideline PCG 2026/2 Apportionment of rental property deductions - ATO compliance approach
• Practical Compliance Guideline 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

Deductions for vacant land

For vacant land you held both before and from 1 July 2019, deductions for expenses you incur for holding the vacant land are only available in certain circumstances.

Land is vacant if, at the time you incur the expense the land either:

• doesn't contain a substantial and permanent structure
• contains a residential premises which isn't in use or available for use
• contains a residential premises constructed or substantially renovated while you're holding the land, and the premises are either  
  • not lawfully able to be occupied
  • lawfully able to be occupied but not rented out or made available for rent.

The expenses involved in holding vacant land include:

• ongoing borrowing costs, including interest payments on money borrowed for the acquisition of the land
• land taxes
• council rates
• maintenance costs.

The expenses involved in holding vacant land don't include:

• the costs of repairing, renovating or constructing a structure on the land
• any interest or borrowing costs associated with repairs, renovation or construction of a structure on the land.

You can still deduct vacant land holding costs if:

• the land is held by an 'excluded entity', that is a
  • corporate tax entity
  • super plan (other than a self-managed super fund)
  • managed investment trust
  • public unit trust
  • unit trust or partnership of which all the members are corporate tax entities, super plans (other than self-managed super funds), managed investment trusts or public unit trusts
• the use of the land is to carry on a business by
  • you
  • your affiliate or an entity of which you're an affiliate
  • your spouse or child under 18 years old
  • an entity connected with you
• you, an affiliate (from the list above), spouse or child, or an entity connected with you, are carrying on a business of primary production and you lease, hire or licence the land to another entity
• you make the land available at arm's length to a business for use in that business
• the land had a substantial and permanent structure but due to an exceptional circumstance (such as a natural disaster, major building fire or substantial building defects) the land is vacant.

For more information, see:

• Taxation Ruling TR 2023/3 Income tax: expenses associated with holding vacant land.
• Deductions for vacant land

Expenses for which you can claim an immediate deduction

You may be able to claim an immediate deduction in the income year you incur the expense for:

• advertising for tenants
• bank charges
• body corporate fees and charges
• cleaning
• local council rates
• gardening and lawn mowing
• in-house audio and video service charges
• insurance
  • building
  • contents
  • loss of rent
  • public liability
• interest on loans
• land tax
• lease document expenses for
  • preparation
  • registration
  • stamp duty
• legal expenses (excluding acquisition costs and borrowing costs)
• mortgage discharge expenses
• pest control
• phone calls and rental
• property agent's fees and commissions (including before the property is available to rent)
• quantity surveyor’s fees
• the costs you incur to relocate tenants into temporary accommodation if the property is unfit to occupy for a period of time
• repairs and maintenance
• cost of a defective building works report in connection to repairs and maintenance conducted
• secretarial and bookkeeping fees
• security patrol fees
• servicing costs, for example, servicing a water heater
• sharing economy platform fees and commissions
• stationery and postage
• tax-related expenses
• travel and car expenses (to the extent that they're deductible)
• water charges.

You can claim only a deduction for these expenses if you incur them and they're not paid or reimbursed by the tenant.

If your rental property is a holiday home, you can't claim ownership and use expenses as a deduction if the property isn't used or held for use mainly to produce assessable rental income. For more information, see holiday homes and Ownership and use expenses for your holiday home.

Expenses before the property is used or held to earn rental income

You can claim expenditure such as interest on loans, local council, water and sewerage rates and charges, land taxes and emergency service levies you incur prior to using the property provided you are holding it to produce assessable rental income. You must incur these expenses with the intent to rent out the property. Evidence of you holding the property to produce assessable rental income, such as communications with real estate agents or rental managers, must be kept.

You won't be holding the property to produce assessable 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 the land before the property can be occupied and held to produce assessable rental income.

If your rental property is also a holiday home, you may not be able to claim your ownership and use expenses. For more information, see Holiday homes.

Asbestos remediation

Work undertaken to an investment property in dealing with asbestos may, in some cases, be a deductible repair. This depends on the nature or extent of the remediation process.

Where the expenditure isn't otherwise deductible as a repair, a deduction may be available as an ‘environmental protection activity’.

If you use your property partly to produce income and partly for private purposes, you need to apportion your expenses.

For more information, see Taxation Ruling TR 2020/2 Income tax: deductions for expenditure on environmental protection activities.

Body corporate fees and charges

Strata title body corporates are constituted under the strata title legislation of the various states and territories.

You may be able to claim a deduction for body corporate fees and charges you incur for your rental property.

Body corporate fees and charges may be incurred to cover the cost of day-to-day administration and maintenance or for a special purpose.

Regular payments you make to body corporate administration funds or general-purpose sinking funds for ongoing administration and general maintenance are payments for the provision of services by the body corporate. You can claim a deduction for these regular payments at the time you incur them. However, if you're required by the body corporate to pay a special levy to fund a particular capital improvement, these levies aren't deductible. This is the case whether that special levy is paid into a special purpose fund or as a special contribution to the general-purpose sinking fund.

If the body corporate raises a special levy to fund certain types of construction costs, you may be able to claim a capital works deduction. You can only claim a capital works deduction once the work is completed and the cost has been charged to either:

• the special purpose fund
• the general-purpose sinking fund, if a special contribution has been levied.

You can't also claim a deduction if the body corporate fees and charges you incur are for things like:

• the maintenance of common gardens
• deductible repairs and building insurance.

For example, you can't claim a separate deduction for common garden maintenance if that expense is already included in body corporate fees and charges.

If you use your property partly to produce income and partly for private purposes, you need to apportion your body corporate fees and charges.

Common property

Common property is that part of a strata plan not comprised in any proprietor's lot. It includes stairways, lifts, passages, common garden areas, common laundries and other facilities intended for common use.

The ownership of the common property varies according to the relevant state strata title legislation. However, in all states, the income derived from the use of the common property is income of lot owners.

You can claim deductions for the common property in proportion to your lot entitlement for:

• capital works
• the decline in value of depreciating assets (in some cases).

For more information, see Deduction for decline in value of depreciating assets.

For more information on strata title body corporates, see Taxation Ruling TR 2015/3 Income tax: matters relating to strata title bodies constituted under strata title legislation.

Interest on loans

If you take out a loan to purchase a rental property, you can claim the interest charged on that loan, or a portion of the interest, as a deduction. However, the property must be rented, or available for rent on commercial terms, in the income year for which you claim a deduction. You can't claim a deduction for interest expenses you incur if either:

• you start to use the property for private purposes
• the property is a holiday home which isn't used or held for use mainly to produce assessable rental income
• you refinance an investment loan for private purposes or otherwise use the loan for a private purpose.

If the expenses were incurred partly for investment and partly for private purposes, you must apportion the expense accordingly. For more information, see Investment loan used for private purpose.

While the property is used or held for rent on commercial terms, you may also claim interest charged on loans taken out:

• to purchase depreciating assets
• for repairs
• for renovations.

Similarly, if you take out a loan to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out. However, if your intention changes while you hold the property, for example, you decide to use the property for private purposes and you no longer use it to produce rent or other income, you can't claim the interest after your intention changes.

If you prepay interest, it may not be deductible all at once, see Prepaid expenses.

If you co-own the property, see Co-ownership of rental property for more information on how to calculate your deduction for interest expenses.

Redraws from a loan

Banks and other lending institutions offer a range of financial products which can be used to acquire a rental property. Many of these products have features which permit flexible repayment and redraw options. For example, you might use a loan facility you obtained to purchase both a rental property and a car for your private use. In cases of this type, the interest on the loan must be apportioned into deductible and non-deductible parts according to the amounts borrowed for the rental property and for private purposes. A simple example of the necessary calculation for apportionment of interest is in example 12. If you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals, and it's used for both private purposes and rental property purposes, you must keep accurate records. This enables you to calculate the interest that applies to the rental property portion of the loan. You must separate the interest that relates to the rental property from any interest that relates to your private use of the funds.

For more information on how to calculate interest for these types of products, see Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities.

You may borrow money to buy a new home and then rent out your previous home. If there is an outstanding balance on the loan you had to purchase the previous home and the property is now used to produce income, the interest on the outstanding loan balance, or part of the interest, will be deductible. However, an interest deduction can't be claimed on the loan you use to buy the new home because it isn't used to produce income. This is the case whether or not the loan for the new home is secured against the former home.

Linked or split loans

Some financial institutions offer more complicated investment loan interest payment arrangements, like 'linked' or 'split' loans which involve 2 or more loans or sub-accounts in which one is used for private purposes and the other for income producing purposes. Repayments are allocated to the private account while the unpaid interest on the income producing account is capitalised. This is designed to allow you to pay off your private home loan faster while deferring payments on your investment rental property loan, maximising your potential interest deduction by creating interest on interest.

This can artificially produce a tax benefit because the interest actually incurred on the investment property loan is greater than the amount of interest that might reasonably be expected to have been incurred but for using the loan arrangement outlined above. In this case we may disallow some or all of your interest deductions. You should seek advice from your recognised tax adviser or contact us to discuss your situation.

For more information, see

• Rental expenses you can claim now – interest expenses.
• Taxation Determination TD 2012/1 Income tax: can Part IVA of the Income Tax Assessment Act 1936 apply to deny a deduction for some, or all, of the interest expense incurred in respect of an 'investment loan interest payment arrangement' of the type described in this Determination?

Co-borrower required by lender

For financial reasons, your lender may require you to have another person named on your loan.

Where a co-borrower is named on the loan to assist you to obtain finance, but is not listed on the title, a legally enforceable written agreement may allow you to claim all the interest expenses. The agreement would need to outline that the full beneficial ownership lies with you. The agreement must be in place when the loan is obtained.

The agreement should state you are 100% liable for the loan repayments, interest and expenses.

Thin capitalisation

If you're an Australian resident and you or any associate entities have certain international dealings, overseas interests or if you're a foreign resident, then thin capitalisation rules may affect you if your debt deductions, such as interest, combined with those of your associate entities for 2025–26 are more than $2,000,000.

Companies, partnerships and trusts that have international dealings will need to complete the International dealings schedule 2026.

For more information on the deductibility of interest, see:

• Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities
• Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities
• Taxation Ruling TR 98/22 Income tax: the taxation consequences for taxpayers entering into certain linked or split loan facilities
• Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith
• Taxation Ruling TR 2019/2 Income tax: whether penalty interest is deductible
• Taxation Determination TD 1999/42 Income tax: do the principles set out in Taxation Ruling TR 98/22 apply to line of credit facilities?
• Taxation Determination TD 2012/1 Income tax: can Part IVA of the Income Tax Assessment Act 1936 apply to deny a deduction for some, or all, of the interest expense incurred in respect of an 'investment loan interest payment arrangement' of the type described in this Determination?
• Rental expenses you can claim now – interest expenses.

If you need help to calculate your interest deduction, seek advice from your recognised tax adviser or contact us to discuss your situation.

Land tax and other State and Territory charges

Land tax liabilities may be deductible, depending on when the land tax liability arises. The timing of when you incur a liability to pay land tax will depend on the relevant state legislation. Your liability to pay land tax generally doesn't rely on the lodgment of a land tax return or on the taxing authority issuing a land tax assessment. In many states, the year in which the property is used for the relevant purposes determines when you're liable, even if an assessment doesn't issue until a later date.

When you receive land tax assessments in arrears, the amount of land tax isn't deductible in the income year in which you pay the arrears. The land tax amounts are deductible in the respective income years to which the liability for the land tax relates. For more information on how to claim a deduction for land tax related to a previous income year, see How to request an amendment to your tax return.

If a landowner receives a land tax assessment for a year, then later in the same income year either sells the property or starts to use it as their residence, there is no requirement to apportion the land tax deduction. We consider that at the time the land tax liability was incurred, it was for an income producing purpose because the liability for it was founded in the property's use for income-producing purposes.

If you receive a land tax credit or adjustment when the property is sold, the recovered amount should be included in your rental income.

Some people living overseas may also be changed a Surcharge land tax for their rental property. As this is imposed on an individual basis it may not be imposed on all the co-owners of the property. The surcharge is deductible to the owner(s) it is imposed on.

A State levy may be imposed if you rent your property out for short-term stays. Such levies may be paid directly by the owner or through the booking agent, if one is used. If a State levy is imposed, you can claim a deduction for the levies you are charged.

A vacant property tax is not generally deductible as the property is not earning assessable income for a significant period of the year.

Lease document expenses

Your share of the costs of preparing and registering a lease and the cost of stamp duty on a lease are deductible to the extent that you have used, or will use, the property to produce income. This also includes any costs associated with an assignment or surrender of a lease.

For example, freehold title can't be obtained for properties in the Australian Capital Territory (ACT). They're commonly acquired under a 99-year crown lease. Therefore, stamp duty, preparation and registration costs you incur on the lease of an ACT property are deductible to the extent that you use the property as a rental property.

For more information on how to apportion lease document expenses if you use your property partly to produce income and partly for private purposes, see Apportionment of rental expenses.

Legal expenses

Some legal expenses you incur in producing your rental income are deductible. These include the costs of:

• evicting a non-paying tenant
• taking court action for recovery of loss of rental income
• defending damages claims for injuries suffered by a third party on your rental property.

However, most legal expenses related to rental properties are of a capital nature and are therefore not deductible. These include costs of:

• purchasing or selling your property
• resisting land resumption
• defending your title to the property.

For more information, see Rental expenses you can claim now.

Non-deductible legal expenses that are capital in nature may form part of the cost base of your property for capital gains tax purposes.

For more information, see Capital gains tax and Guide to capital gains tax 2026.

Mortgage discharge expenses

Mortgage discharge expenses are the costs involved in a lender, such as a bank, discharging a mortgage over a property and are separate to payments of principal and interest on the loan. These costs are deductible in the year they're incurred to the extent that you took out the mortgage as security for the repayment of money you borrowed to produce your rental income.

For example, if you used a property to produce rental income for half the time you held it and as your holiday home for the other half of the time, 50% of the costs of discharging the mortgage are deductible.

For more information on how to apportion your mortgage discharge expenses, see Apportionment of rental expenses.

Mortgage discharge expenses may also include penalty interest payments. Penalty interest payments are amounts paid to a lender, to agree to accept early repayment of a loan, including a loan on a rental property. The amounts are commonly calculated by reference to the number of months that interest payments would have been made had the premature repayment not been made.

Penalty interest payments on a loan relating to a rental property are deductible if either:

• the loan moneys borrowed are secured by a mortgage over the property and the payment effects the discharge of the mortgage
• payment is made to rid the taxpayer of a recurring obligation to pay interest on the loan.

For more information, see Taxation Ruling TR 2019/2 Income tax: whether penalty interest is deductible.

Property agent fees or commissions

You can claim the cost of fees, such as regular management fees or commissions, you pay to a property agent or real estate agent for managing, inspecting or collecting rent for a rental property on your behalf.

You're unable to claim the cost of:

• commissions or other costs paid to a real estate agent or other person for the sale or disposal of a rental property
• buyer's agent fees paid to any entity or person you engage to find you a suitable rental property to purchase.

These costs may form part of the cost base of your property for capital gains purposes.

Repairs and maintenance

Expenditure for repairs you make to the property may be deductible. However, generally the repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property.

Repairs generally involve restoring a defective, damaged or deteriorated item back to working condition and often require the replacement or renewal of a worn out or broken part, for example, replacing worn or damaged roof tiles or fixing an air conditioner that is no longer working. Maintenance generally involves keeping the property in a tenantable condition, for example repainting faded or damaged interior walls.

If your property is your holiday home, you can't claim deductions for repairs and maintenances unless the property is used (or held for use) mainly to produce rental income.

However, expenses which are capital, or of a capital nature aren't deductible as repairs or maintenance. The following are examples of expenses which are capital or of a capital nature:

• replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or curtains)
• improvements, renovations, extensions and alterations
• initial repairs – for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

Replacing an entire structure or unit of property that is a depreciating asset, for example a stove or an air conditioner, may trigger a balancing adjustment event. You may also claim a decline in value deduction for the replacement depreciating asset. For more information, see Guide to depreciating assets 2026.

You may be able to claim some construction expenses as capital works deductions where the expenses are capital or of a capital nature. For more information, see Capital works deductions.

Expenses of a capital nature may form part of the cost base of the property for capital gains tax purposes (but not generally to the extent that capital works deductions have been or can be claimed for them).

You can't claim a deduction for repairs if your insurer pays for the work. If you receive an insurance or compensation payment for work you paid for and claimed as a deduction in an earlier year, you need to include it in your income.

For more information, see Capital gains tax guide 2026.

 

 

Repairs to a rental property will generally be deductible if:

• the property continues to be rented on an ongoing basis, or
• the property remains available for rent on commercial terms but there is a short period when the property is unoccupied, for example, where unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants.

Expenditure for repairs you make to the property may also be deductible where the expenditure is incurred in a year of income that the property is held for income producing purposes, even though the property has previously been held by you for private purposes, and some or all of the damage is attributable to when the property was held for private purposes.

If you no longer rent the property, the cost of repairs may still be deductible provided:

• the need for the repairs is related to the period during which the property was used by you to produce income
• the property was income-producing during the income year in which you incurred the cost of repairs.

Examples of repairs for which you can claim deductions are:

• replacing a cracked pane in a window
• stopping a tap from leaking
• repairing an electrical appliance.

Examples of improvements for which you can't claim deductions are:

• landscaping
• insulating the house
• renovating a kitchen or bathroom

For more information, see:

• Capital gains tax
• Rental expenses - Repairs and maintenance 
• Guide to capital gains tax 2026 
• Guide to depreciating assets 2026 
• Taxation Ruling TR 97/23 Income tax: deductions for repairs.

Travel and car expenses

Travel expenses relating to a residential rental property are generally not deductible.

You may be entitled to claim a deduction for travel expenses you incur relating to your rental property if one of the following applies:

• you're an excluded entity
• you're using the property in carrying on a business (including a business of letting rental properties)
• the property isn't a residential rental property.

Travel expenses include the costs of travel to inspect, maintain or collect rent for the property.

If you're entitled to claim a deduction for a travel expense relating to your rental property, you should claim it as follows:

• You're allowed a full deduction where the sole purpose of the trip relates to the rental property. However, in other circumstances you may not be able to claim a deduction, or you may be only entitled to a partial deduction.
• If you fly to inspect your rental property, stay overnight, and return home on the following day, all of the airfares and accommodation expenses would generally be allowed as a deduction provided the sole purpose of your trip was to inspect your rental property.

For the appropriate cents per kilometre rates, see:

• Individual tax return instructions 2026 
• Work-related car expenses

Apportionment of travel expenses

Where travel related to your commercial rental property or to your residential rental property used in carrying on a business of letting rental properties is combined with a holiday or other private activities, you may need to apportion the expenses.

If you travel to inspect the property and combine this with a holiday, you need to take into account the reasons for your trip. If the main purpose of your trip is to have a holiday and the inspection of the property is incidental to that main purpose, you can't claim a deduction for the cost of the travel. However, you may be able to claim local expenses directly related to the property inspection and a proportion of your accommodation expenses.

You may also need to apportion your travel expenses if they relate partly to your commercial rental property or residential rental property used in carrying on a business of letting rental properties, and partly to residential rental property not used in carrying on a business of letting rental properties.

For more information, see Law Companion Ruling LCR 2018/7 Residential premises deductions: travel expenditure relating to rental investment properties.

For more information, see Rental properties and travel expenses.

Local government expenses

You can claim a deduction for local government rates and levies for the period your property is used (or held for use) to produce rental income.

If your property is your holiday home, you can't claim deductions for local government expenses unless the property is used (or held for use) mainly to produce rental income.

Where you fail to pay local government rates and charges for the property by the due dates you may become liable to pay interest charges under the relevant legislation, you can claim these interest charges as a tax deduction. A deduction isn't excluded by the penalty provisions of the tax law. We don't consider the imposition of interest in these circumstances a pecuniary punishment for a breach of the Local Government Act but rather an administrative charge recognising the time value of money. The use of a time factor in the calculation is designed to compensate the local government for the full amount of rates not having been paid by the due date. Therefore the interest payment is deductible to the taxpayer in the year in which it's incurred.

If the local council where your rental property is located imposes an annual emergency services levy, you can claim a deduction for that amount. An emergency services levy is a charge imposed by a local council on property owners to meet some of the costs for the provision of emergency services by the Country Fire Authority, the Metropolitan Fire Authority, the Police Force and other agencies. It's often calculated based on the value of the land and charged annually. We consider it's an ongoing expense incurred in the course of earning your rental income and is therefore a deductible expense.

If you use your property partly to produce income and partly for private purposes, you need to apportion your expenses.

Expenses deductible over several income years

There are 3 types of expenses you may incur for your rental property that may be claimed over several income years:

• borrowing expenses
• amounts for decline in value of depreciating assets (allowed only in certain circumstances)
• capital works deductions

We discuss each of these categories in detail below.

Borrowing expenses

Borrowing expenses are those costs you incur in taking out a loan for a rental property.

If your property is your holiday home, you can't claim deductions for borrowing expenses unless the property is used (or held for use) mainly to produce rental income.

Amounts you can claim a deduction for include:

• loan establishment fees
• title search fees your lender charges
• costs for preparing and filing mortgage documents
• mortgage broker fees
• stamp duty you pay on the mortgage
• fees for a valuation required for loan approval
• lender's mortgage insurance the lender takes out and bills to you.

The following amounts are not borrowing expenses:

• the principal amount you borrow and any repayments you make on a loan
• insurance policy premiums that pay your loan on the property in the event that you die or become disabled or unemployed
• interest expenses
• stamp duty you pay on the transfer of the property
• stamp duty you incur to acquire a leasehold interest in property (such as an ACT 99-year Crown lease).

If your total borrowing expenses are more than $100, the deduction is spread over 5 years (starting from the day when the loan is taken out) or the term of the loan, whichever is less. If the total deductible borrowing expenses are $100 or less, they're fully deductible in the income year you incur them. If you repay the loan early and in less than 5 years, you can claim a deduction for the balance of the borrowing expenses in the year the loan is repaid in full.

If you take out the loan part way through the income year, apportion the deduction for the first income year according to the number of days in the year that you had the loan.

You also need to apportion your borrowing expenses if you use your property partly to produce income and partly for private purposes.

You can use our Deductible borrowing expenses calculator This link will download a file to work out your claim.

Deduction for decline in value of depreciating assets

You can deduct an amount equal to the decline in value in 2025–26 of a depreciating asset that you held at any time during the year. However, you reduce your deduction to the extent you use the asset for a purpose other than a taxable purpose. From 1 July 2017, you reduce your deduction by the extent you installed or used the asset in your residential rental property to derive rental income and the asset was a second-hand depreciating asset (unless an exception applies).

For more information, see Limit on deductions for decline in value of second-hand depreciating assets.

When you purchase a rental property, you're generally treated for tax purposes as having bought a building, plus various separate items of 'plant'. Items of plant are depreciating assets, such as air conditioners, stoves and other items. You need to allocate the total purchase price of the property between the 'building' and the various depreciating assets. For more information on 'plant', see Descriptions and examples of rental property items.

We regard some items commonly found in a rental property as part of the setting for the rent-producing activity, therefore these items aren't treated as separate assets. If your depreciating assets aren't plant, and they're affixed to, or otherwise part of, a building or structural improvement, your expenditure will generally be construction expenditure for capital works. You may only claim a capital works deduction for those items.

For more information, see Capital works deductions.

Limit on deductions for decline in value of second-hand depreciating assets

There are different rules for the decline in value of certain second-hand depreciating assets you purchase with your residential rental property after 1 July 2017. If you use these assets to produce rental income from your residential rental property, you can't claim a deduction for their decline in value unless you're:

• using the property in carrying on a business (including a business of letting rental properties)
• an excluded entity.

For the meaning of 'residential rental property' and 'excluded entity', see Descriptions and examples of rental property items.

Second-hand depreciating assets are depreciating assets previously installed ready for use or used:

• by another entity (except as trading stock)
• in your private residence
• for a non-taxable purpose, unless that use was occasional (for example, we would consider staying at the property for one evening while carrying out maintenance activities an occasional use).

These rules apply to the depreciating assets that you either:

• enter into a contract to acquire, or otherwise acquired, after 7:30 pm on 9 May 2017
• used or had installed ready for use for any private purpose in 2016–17 or earlier income years, for which you weren't entitled to a deduction for a decline in value in 2016–17 (for example, depreciating assets in a property that was your home in 2016–17 that you turned into your residential rental property in 2017–18).

Regardless of when you purchase the asset, you can claim a deduction for the decline in value of:

• new depreciating assets in your residential property
• depreciating assets in your residential rental property that you install or use for a taxable purpose other than the purpose of deriving rental income.

 

Assets in new residential rental properties

If you acquire a newly built residential property from a developer, or buy a residential property that has been substantially renovated, you can claim a deduction for a decline in value of a depreciating asset in the property (or its common area) if:

• no one was previously entitled to a deduction for the asset
• either
  • no one resided in the property before you acquired it
  • the asset was installed for use or used at the property, and you acquired the property within 6 months of it being built or substantially renovated.

Substantial renovations of a building are renovations where you remove or replace all, or substantially all, of a building. The renovations may, but don't necessarily have to, involve the removal or replacement of foundations, external walls, interior supporting walls, floors, the roof or staircases.

For more information, see Goods and services tax ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises?

How do you work out your deduction?

You work out your deduction for the decline in value of a depreciating asset using either the diminishing value method or the prime cost method. Both methods use the effective life of the asset. You can work out your deductions using the Depreciation and capital allowances tool. You can also use this tool during the year to progressively enter amounts.

Diminishing value method

The diminishing value method assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time.

For depreciating assets you start to hold on or after 10 May 2006, you generally use the following formula for working out the decline in value using the diminishing value method:

Base value (see Note 1) × (days held (see Note 2) ÷ 365) × (200% ÷ asset's effective life)

Note 1: For the income year in which an asset is first used or installed ready for use for any purpose, the base value is the asset’s cost. For a later income year, the base value is the asset’s opening adjustable value plus any amounts included in the asset’s second element of cost for that year.

Note 2: Days held can be 366 in a leap year.

This formula doesn't apply in some cases, such as if you dispose of and reacquire an asset to work out the decline in value of the asset using this formula.

For depreciating assets you start to hold before 10 May 2006, the formula for working out decline in value using the diminishing value method is:

Base value (see Note 1) × (days held (see Note 2) ÷ 365) × (150% ÷ asset's effective life)

Under the diminishing value method, the decline in value of an asset for a particular income year can't amount to more than its base value for that income year.

Prime cost method

The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life. The formula for working out decline in value using the prime cost method is:

Asset's cost × (days held (see Note 2 ÷ 365) × (100% ÷ asset's effective life)

The formula under the prime cost method may have to be adjusted if the cost, effective life or adjustable value of the asset is modified. For more information, see Guide to depreciating assets 2026.

Under the prime cost method, the general rule is that the decline in value of an asset for a particular income year can't exceed its opening adjustable value for that year and any amount included in the second element of its cost for that year. For an income year in which the asset start time occurs, the decline in value of the asset can't exceed its cost.

Elements of cost

An asset’s cost has 2 elements, the:

• first element is generally, amounts you're taken to have paid to hold the asset, such as the purchase price.
• second element is generally, the amount you're taken to have paid to bring the asset to its present condition, such as the cost of capital improvements to the asset.

If more than one person holds a depreciating asset, each holder works out their deduction for the decline in value of the asset based on their interest in the asset and not on the cost of the asset itself.

The adjustable value of a depreciating asset is its cost (first and second elements) less its decline in value up to that time. Adjustable value is similar to the concept of undeducted cost used in the former depreciation provisions. The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.

Taxable purpose

A depreciating asset is used for a taxable purpose if it's used for the purpose of producing assessable income. For example, new carpet in a rental property which is used or held to produce assessable rental income, is used for a taxable purpose.

If you use a depreciating asset for a purpose other than a taxable purpose (for example, you use the same lawn mower at both your rental property and your private residence) you can only claim a partial deduction for the asset’s decline in value, using the percentage of the asset's total use that was for a taxable purpose.

If the asset is a second-hand depreciating asset you use to derive rental income from your residential property, you may not be able to claim a deduction for its decline in value. See Limit on deductions for decline in value of second-hand depreciating assets.

Effective life

Generally, the effective life of a depreciating asset is how long it can be used to produce income:

• having regard to the wear and tear you reasonably expect from your expected circumstances of use
• assuming that it will be maintained in reasonably good order and condition
• having regard to the period within which it's likely to be scrapped, sold for no more than scrap value or abandoned.

Effective life can be expressed in whole years, or in fractions of years – for example, 5 and two-thirds. It isn't rounded to the nearest whole year.

For most depreciating assets you can choose to work out the effective life yourself or to use an effective life determined by the Commissioner of Taxation.

The information you could use to make an estimate of effective life of an asset is listed in Guide to depreciating assets 2026.

In making his determination, the Commissioner assumes the depreciating asset is new and has regard to general industry circumstances of use.

As a general rule, use the effective life that is in force at the time (the relevant time) you:

• enter into a contract to acquire the depreciating asset
• otherwise acquire it
• start to construct it.

To make your own estimate of your asset's effective life or use the Commissioner's effective life determinations, see Effective life of depreciating assets.

Immediate deduction for certain non-business depreciating assets costing $300 or less

The decline in value of certain depreciating assets costing $300 or less is their cost. This means you get an immediate deduction for the cost of the asset to the extent that you use it to produce assessable income, including rental income, during the income year in which the deduction is available.

The immediate deduction is available if all the following tests are met for the asset:

• it cost $300 or less
• you used it mainly for the purpose of producing assessable income that wasn't income from carrying on a business (for example, rental income where your rental activities didn't amount to the carrying on of a business of letting rental properties)
• it wasn't part of a set of assets costing more than $300 that you started to hold in the income year
• it wasn't one of several identical, or substantially identical, assets that you started to hold in the income year that together cost more than $300.

If you hold an asset jointly with others and the cost of your interest in the asset is $300 or less, you can claim the immediate deduction even though the total cost of the asset was more than $300.

For more information, see Partners carrying on a business of letting rental properties.

 

The amount of an immediate deduction may also need to be reduced if the asset is used for purposes other than taxable purposes (see subsection 40-25(2) of the ITAA 1997). For more information, see Limit on deductions for decline in value of second-hand depreciating assets.

For more information about immediate deductions for depreciating assets costing $300 or less, see Guide to depreciating assets 2026.

Low-value pooling

You can allocate low-cost assets and low-value assets relating to your rental activity to a low-value pool.

A low-cost asset is a depreciating asset that costs less than $1,000 as at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose.

A low-value asset is a depreciating asset that isn't a low-cost asset but which on 1 July 2025 (or 1 July of the relevant income year) had an opening adjustable value of less than $1,000 under the diminishing value method.

If you hold an asset jointly and the cost of your interest in the asset or the opening adjustable value of your interest is less than $1,000, you can allocate your interest in the asset to your low-value pool.

Once you choose to create a low-value pool and allocate a low-cost asset to it, you must pool all other low-cost assets you start to hold from that time on. However, this doesn't apply to low-value assets. You can decide whether to allocate low-value assets to the pool on an asset-by-asset basis.

Once you allocate an asset to the pool, it remains in the pool.

Once you allocate an asset to a low-value pool it isn't necessary to work out its adjustable value or decline in value separately. You only require one annual calculation for the decline in value for all of the depreciating assets remaining in the pool.

You work out the deduction for the decline in value of depreciating assets in a low-value pool using a diminishing value rate of 37.5%.

For the income year you allocate a low-cost asset to the pool, you work out its decline in value at a rate of 18.75%, or half the pool rate. Halving the rate recognises that you may allocate an asset to the pool throughout the income year and eliminates the need to make separate calculations for each asset using the actual date you allocate it to the pool.

When you first allocate a depreciating asset to a low-value pool, you must make a reasonable estimate of the percentage that you'll use the asset for a taxable purpose over its effective life (for a low-cost asset) or its remaining effective life (for a low-value asset). This percentage is known as the asset’s taxable use percentage.

From 1 July 2017, only include the taxable purpose of using the asset to produce rental income from residential rental property if you would be entitled to claim a deduction for the decline in value of that asset. See Limit on deductions for decline in value of second-hand depreciating assets. For the meaning of 'excluded entity' and 'residential rental property', see Descriptions and examples of rental property items.

It's this taxable use percentage of the cost or opening adjustable value that is written off through the low-value pool.

For more information on low-value pooling, and on how to treat assets you only use partly to produce assessable income, including rental income, and how to treat the disposal of assets from a low-value pool, see Guide to depreciating assets 2026.

You can work out your deduction for assets you allocate to a low-value pool using the Depreciation and capital allowances tool. You can also use this tool for each income year to calculate decline in value deduction amounts.

If you're an individual who owns or jointly owns a rental property, you claim your low-value pool deduction for rental assets as a ’Low-value pool deduction’ in your tax return. You don't take this deduction into account in the amount you show at 'Rent’ in your tax return.

What happens if you no longer hold or use a depreciating asset?

If you cease to hold or use a depreciating asset, a balancing adjustment event will occur. If there is a balancing adjustment event, you need to work out a balancing adjustment amount to include in your assessable income or to claim as a deduction.

A balancing adjustment event occurs for a depreciating asset if:

• you stop holding it – for example, if the asset is sold, lost or destroyed
• you stop using it and expect never to use it again
• you stop having it installed ready for use and you expect never to install it ready for use again
• you haven't used it and decide never to use it
• a change occurs in the holding or interests in an asset which was or is to become a partnership asset.

You work out the balancing adjustment amount by comparing the asset’s termination value (such as the proceeds from the sale of the asset) and its adjustable value at the time of the balancing adjustment event. If the termination value is greater than the adjustable value, you include the excess in your assessable income. If you're an individual who owns or has co-ownership of a rental property, you show the assessable amount as 'Other income' in your tax return. You don't take it into account in the amount you show at 'Rent'.

If the termination value is less than the adjustable value, you can deduct the difference.

For more information on balancing adjustments, see Guide to depreciating assets 2026.

If a balancing adjustment event happens to a depreciating asset that you used at some time other than for income-producing purposes (for example, privately) then a capital gain or capital loss might arise to the extent that you used the asset for the other purpose.

From 1 July 2017, if a balancing adjustment event happens to a depreciating asset to which the rules about deductions for decline in value of second-hand depreciating assets in residential rental properties apply, then a capital gain or capital loss might arise.

You can work out balancing adjustments using the Depreciation and capital allowances tool.

For more information on capital gains tax and depreciating assets, see Guide to depreciating assets 2026.

Purchase and valuation of depreciating assets

Where you pay an amount for a depreciating asset and something else, only the part that is reasonably attributable to the depreciating asset is treated as its purchase value.

Where you purchase a rental property from an unrelated party, one objective means of establishing your cost of the depreciating assets acquired with the property is to have their value, as agreed between the contracting parties, specified in the sale agreement. The values need to be reasonable. If the sale agreement for your property doesn't specify separate values for the depreciating assets, you'll need to work out a reasonable cost for the assets to determine your claim for depreciation.

You can do this yourself or you may wish to use a qualified valuer. Any valuation methodology used to work out the cost of the depreciating assets must be able to demonstrate a reasonable basis for that value. For more information on valuing depreciating assets, see Market valuation for tax purposes.

Apportionment of values between various assets affects the cost base of the property which is subject to capital gains tax. Subtract any amounts you allocate to the cost of depreciating assets purchased with the rental property from the purchase price of the property, to work out the CGT cost base of the rental property.

Working out your deductions for decline in value of depreciating assets

Below are 2 examples of how to work out decline in value deductions for new assets in newly built residential rental properties.

The Guide to depreciating assets 2026 has 2 worksheets:

• Worksheet 1: Depreciating assets
• Worksheet 2: Low-value pool.

Use these to work out your deductions for decline in value of depreciating assets. You can also work out your deductions using the Depreciation and capital allowances tool.

 

Capital works deductions

You can deduct certain kinds of construction expenditure. In the case of residential rental properties, the deductions would generally be spread over a period of 25 or 40 years. These amounts are referred to as capital works deductions. Your total capital works deductions can't exceed the construction expenditure for the property. No deduction is available until the construction is complete.

Deductions for construction expenditure apply to capital works such as:

• a building or an extension – for example, adding a room, garage, patio or pergola
• alterations, such as removing or adding an internal wall
• structural improvements to the property – for example, adding a gazebo, carport, sealed driveway, retaining wall or fence.

You can only claim deductions for the period during the year that the property is used or held to produce rental income. You also need to apportion you deduction if only part of your property is used to produce income. Where the rental property is destroyed, for example by fire or a natural disaster event, and results in a total loss of the asset, you can claim a deduction in the income year the capital works are destroyed for construction expenditure that hasn't yet been deducted. However, you must reduce this deduction by any insurance and salvage receipts.

If however, using the same example above, during an income year the building is affected by fire and the building can't be rented or made available for rent, but it's expected to be made available for rent again, then you can't claim a deduction for capital works for the number of days that the building isn't available for rent.

If you claimed capital works deductions based on construction expenditure, you can't take that expenditure into account again in working out any other types of deductions you claim, such as deductions for decline in value of depreciating assets.

Amount of deduction

The amount of the deduction you can claim for an eligible new 'build to rent' development is 4%. This is a new measure which applies where construction of an eligible new build to rent development started after 9 May 2023. For further information see, Incentives to increase the supply of housing.

If it isn't an eligible new build to rent development, then the amount of deduction you can claim depends on the type of construction and the date construction started.

Table 1 below shows you the types of rental property construction that qualify. If the type of construction you own (or own jointly) doesn't appear next to the relevant ‘date construction started’ in the table, you can't claim a deduction. If the type of construction qualifies, Table 2 shows the rate of deduction available.

‘Certain buildings’ in Table 1 are:

• apartment buildings in which you own or lease at least 10 apartments, units or flats, or
• a hotel, motel or guest house that has at least 10 bedrooms.

Table 1: Types of rental property construction that qualify for deduction

Date construction started	Type of construction for which deduction can be claimed
Before 22 August 1979	None
22 August 1979 to 19 July 1982	Certain buildings intended to be used on completion to provide short-term accommodation to travellers
20 July 1982 to 17 July 1985	Certain buildings intended to be used on completion to provide short-term accommodation to travellers Building intended to be used on completion for non-residential purposes (for example, a shop or office)
18 July 1985 to 26 February 1992	Any building intended to be used on completion for residential purposes or to produce income
27 February 1992 to 18 August 1992	Certain buildings intended to be used on completion to provide short-term accommodation to travellers Any other building intended to be used on completion for residential purposes or to produce income Structural improvements intended to be used on completion for residential purposes or to produce income
19 August 1992 to 30 June 1997	Certain buildings intended to be used on completion to provide short-term accommodation to travellers Any other building intended to be used on completion for residential purposes or to produce income Structural improvements intended to be used on completion for residential purposes or to produce income Environment protection earthworks intended to be used on completion for residential purposes or to produce income
After 30 June 1997	Any capital works used to produce income (even if, on completion, it wasn't intended that they be used for that purpose)

Table 2: Rate of deduction based on date construction started

Date construction started	Rate of deduction per income year
Before 22 August 1979	nil
22 August 1979 to 21 August 1984	2.5%
22 August 1984 to 15 September 1987	4%
After 15 September 1987	2.5%, except 4% for eligible new build to rent developments where construction started after 9 May 2023

Where construction of a building to provide short-term accommodation for travellers commenced after 26 February 1992, the rate of deduction was increased to 4%.

For apartment buildings, the 4% rate applies to apartments, units or flats only if you own or lease 10 or more of them in the building.

The deduction can be claimed for:

• 25 years from the date construction was completed in the case of a 4% deduction
• 40 years from the date construction was completed in the case of a 2.5% deduction.

If the construction was completed part of the way through the income year, you can claim a pro-rata deduction for that part.

Construction expenditure that you can claim

Construction expenditure is the actual cost of constructing the building or extension. You can claim a deduction for expenditure you incur in the construction of a building if you contract a builder to construct the building on your land. This includes the component of your payments that represents the profit made by individual tradespeople, builders, and architects. If you're an owner/builder, the value of your contributions to the works – for example, your labour and expertise and any notional profit element, don't form part of the construction expenditure.

If you purchase your property from a speculative builder, you can't claim the component of your payment that represents the builder’s profit margin as a capital works deduction.

Some costs that you may include in construction expenditure are:

• preliminary expenses such as architects’ fees, engineering fees and the cost of foundation excavations
• payments to carpenters, bricklayers and other tradespeople for construction of the building
• payments for the construction of retaining walls, fences and in-ground swimming pools.

Construction expenditure that can't be claimed

Some costs you can't include in construction expenditure are:

• the cost of the land on which the rental property is built
• expenditure on clearing the land before construction
• earthworks that are permanent, can be economically maintained and aren't integral to the installation or construction of a structure
• expenditure on landscaping.

Changes in building ownership

Where ownership of a building changes, the right to claim any undeducted construction expenditure for capital works passes to the new owner. The new owner should confirm that the building was constructed during one of the appropriate periods outlined in Table 1. To be able to claim the deduction, the new owner must continue to use the building to produce income.

If the previous owner was allowed capital works deductions, and the capital works started after 26 February 1992, they must give you, as the new owner, information that will enable you to calculate those deductions going forward. Where the property wasn't previously used to produce assessable income, the owner disposing of the property doesn't need to provide the purchaser with that information. In this situation the purchaser can get an estimate from a professional. For more information, see Estimating construction costs.

For more information on providing a notice or certificate, see Subsection 262A(4AJA) of Income Tax Assessment Act 1936 (ITAA 1936).

Estimating construction costs

Where a new owner can't precisely determine the construction expenditure associated with a building, an estimate provided by an appropriately qualified person may be used. Appropriately qualified people include:

• a clerk of works, such as a project organiser for major building projects
• a supervising architect who approves payments at stages of projects
• a builder who is experienced in estimating construction costs of similar building projects
• a quantity surveyor.

Unless they're otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor the experience to make such an estimate.

The cost of engaging an appropriately qualified person to estimate the construction costs of a rental property is deductible in the income year you incur the expense. You make your claim for the expense, or your share of the expense if you incur it jointly, at D10 Cost of managing tax affairs 2026 in your tax return.

For more information on construction expenditure and capital works deductions, see:

• Taxation Ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements
• Work out your capital works deductions.

Cost base adjustments for capital works deductions

In working out a capital gain or capital loss from a rental property, you may need to reduce the cost base and reduced cost base to the extent that it includes construction expenditure for which you have claimed or can claim a capital works deduction.

Cost base

You must exclude from the cost base of a CGT asset the amount of capital works deductions you claimed or can claim for the asset if you either:

• acquire the asset after 7:30 pm AEST on 13 May 1997
• acquire the asset before that time and the expenditure that gave rise to the capital works deductions was incurred after 30 June 1999.

A CGT asset includes a building, structure or other capital improvement to land that is treated as a separate asset for CGT purposes.

For information on when a building, structure or other capital improvement to land is treated as a CGT asset separate from the land, see Major capital improvements to a dwelling acquired before 20 September 1985 in Guide to capital gains tax 2026.

Reduced cost base

Exclude the amount of the capital works deductions you have claimed or can claim for expenditure you incur for an asset from the reduced cost base.

For more information on whether you can claim certain capital works deductions, see:

• Taxation Determination TD 2005/47 Income tax: what do the words ‘can deduct’ mean in the context of those provisions in Division 110 of the Income Tax Assessment Act 1997 which reduce the cost base or reduced cost base of a CGT asset by amounts you ‘have deducted or can deduct’, and is there a fixed point in time when this must be determined?
• Practice Statement Law Administration PS LA 2006/1 (GA) Calculating cost base of a CGT asset where there is insufficient information to determine any capital works deduction under Division 43 of the ITAA 1997.

Limited recourse debt arrangements

You must include excessive deductions for capital allowances as assessable income, if expenditure on a depreciating asset (which includes construction expenditure) is financed or refinanced wholly or partly by limited recourse debt. This includes a notional loan under certain hire purchase or instalment sale agreements of goods.

This will occur where the limited recourse debt arrangement terminates but hasn't been paid in full by the debtor. Because the debt hasn't been paid in full, the capital allowance deductions, including capital works deductions, for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt wasn't counted as capital expenditure of the debtor. Special rules apply for working out whether the debt has been paid in full.

If you're not sure what constitutes a limited recourse debt or how to work out your adjustment to assessable income, contact your recognised tax adviser.

Prepaid expenses

If you prepay a rental property expense, such as insurance or interest on money you borrow, you can claim an immediate deduction if:

• the expense covers a period of 12 months or less, and
• the period ends on or before 30 June 2027.

A prepayment that doesn't meet these criteria and is $1,000 or more may have to be spread over 2 or more years. This is also the case if you can, but choose not to, deduct certain prepaid business expenses immediately.

If your property is your holiday home, you can't claim deductions for prepaid expenses that relate to your ownership and use of the property unless it is used (or held for use) mainly to produce rental income.

If you use your property partly to produce income and partly for private purposes, you need to apportion your prepaid expenses.

For more information, see Deductions for prepaid expenses 2026.

Continue to: Apportionment of rental expenses

Return to: Rental income

Apportionment of rental expenses

There may be situations where not all of your expenses are deductible, and you need to work out the deductible portion. To do this you subtract any non-deductible expenses from the total amount you have for each category of expense; what remains is your deductible expense.

You'll need apportion your expenses, that is, work out the amount of your expenses that relate to your income-producing activities, if any of the following apply:

• your property is only used or held to earn rental income for part of the income year
• your property is treated as vacant land for part of the year.
• you use your property for private purposes for part of the income 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)
• your investment loan is partially used for private purposes.

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 out (time-based method)
• area of the property rented out (area-based method).

You may need to use a combination of the time-based and the area-based apportionment methods 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 rate. 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 you receive isn't included in your assessable income, 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 if you rent your property to family and friends at the market rate of rent.

To establish that your property has been rented at a market rate of rent, 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.

 

 

Property used or held for part-year rental

If you use your property for both private purposes and to produce assessable rental income, you can't claim a deduction for the portion of any expenses that relate to your private use. That is, you can't claim a deduction for any expenses you incur for those periods when the property wasn't used or held to earn rental income. This includes when you, your relatives or your friends use it for private purposes.

Where property is a holiday home and ownership and use expenses are not denied, you can use the time-based method to work out your deductions if your property was used or held to earn rental income for part of the income year. For example, if your property was rented from 2 February to 30 June.

In some circumstances it may be easy to calculate the portion of an expense that is private in nature. For example, council rates paid for a full year could be apportioned according to the proportion of the year that:

• the property was rented out, and
• available for rent on commercial terms.

It may not be appropriate to apportion all your expenses on the same basis. For example, expenses that relate solely to the renting of your property are fully deductible and you don't need to apportion them based on the time the property was rented out. Such costs include:

• real estate agent commissions
• sharing economy platform fees and commissions
• costs of advertising for tenants
• phone calls you make to a tradesperson to fix damage caused by a tenant
• the cost of removing rubbish left by tenants.

Certain expenses that relate solely to periods when the property isn't rented out aren't deductible. This would include the cost of phone calls you make to a tradesperson to fix damage caused when you were using the property for private purposes.

Time-based method

To work out your rental property deductions for periods when you used (or held) your 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 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. This is because when the room in your home is not being rented out, it is treated as being used privately as part of your home and isn't available for rent on commercial terms.

Available for rent on commercial terms

Factors that indicate that your property is available for rent on commercial terms include:

• It being advertised in ways which gives it broad exposure to potential tenants
• the rental terms, including the rental rate, are similar to comparable properties in the same area
• requests to rent the property are actively monitored.

Factors that indicate your property isn't available for rent on commercial terms include:

• it's advertised in ways that limit its exposure to potential tenants – for example, you only advertise the property
  • at your workplace
  • by word of mouth
  • on restricted social media groups
  • during periods when the likelihood of it being rented out is very low
• the property is blocked out for private usage by you or your family and friends (at less than market rates) during periods of likely rental demand
• the location, condition or accessibility to the property, mean that it's unlikely tenants will seek to rent it
• placing unreasonable or stringent conditions on tenants renting out the property, when compared to similar properties, that reduce the likelihood of the property being rented out, for example
  • setting the rent above the rate of comparable properties in the area
  • requiring prospective tenants to provide references for short holiday stays as well as having conditions like ‘no children’
  • making parts of the property inaccessible to tenants
• requests to rent the property are not actively monitored or you refuse to rent out the property to interested people without adequate reasons.

 

Time-based apportionment examples

 

Clear change in use of your rental property during the income year

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 demand for the property due to seasonal patterns, such as a ski lodge or a beach house.

Only part of your property is used to earn rent

If you rent out part of your property (for example, the lower floor of a 2-storey 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 out that part of your property for part of the year.

Area-based method

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.

 

 

 

Other methods

You may have to use other methods to apportion your expenses if you rented your property on a non-arm's length basis.

Non-arm's length rental

If you're renting your property to family or friends and charging less than the market rate of rent, 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.

 

Investment loan used for private purposes

If you take out a loan to purchase a rental property, you can claim the interest on that loan as a deduction. However, to the extent that the loan is used or refinanced for a private purpose, or partly for a private purpose, you must apportion the interest expense to account for the private use.

 

A simple example of the necessary calculation for apportionment of interest is in example 12.

For more information, see Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities.

For more information, see:

• Taxation Ruling TR 2026/1 Income tax: rental property income and deductions for individuals who are not in business
• Practical Compliance Guideline PCG 2026/2 Apportionment of rental property deductions – ATO compliance approach
• Practical Compliance Guideline 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
• Taxation ruling TR 97/23 Income tax: deductions for repairs.