What to consider before buying a rental property

Before you buy your rental property

When you’re preparing to buy a rental property, there are a few important things to think about to make sure you start off on the right track.

Get the right information

Whether you have just bought a rental, or you are thinking about buying one, it’s important to get the right information before you start. Speaking with a registered tax agent, or doing your own research from a reliable source (like our website) can help you prepare and understand why you need to:

• keep records right from the start
• work out what expenses you can claim as deductions (including how and when)
• work out if you need to pay tax instalments (PAYG Instalments) throughout the year
• declare all rental-related income in your tax return
• consider the capital gains tax (CGT) implications if you sell.

You should also check this information regularly to ensure you’re relying on the most up-to-date advice.

Tax agents must be registered with the Tax Practitioners Board (TPB). You can find a registered tax agent or check if a person is registered by visiting the TPB websiteExternal Link.

For more help see, Residential rental properties.

Use our net rental income worksheet to find common rental expenses and help you estimate if a property is likely to generate a net income or loss before you buy.

Learn which records you need to keep

The key to making tax time easier is keeping good records and creating a record system that works for you.

When you buy a rental property, you will need to keep records from the time you buy the property, through to 5 years after you sell it.

There are many types of rental records you will need to keep. These can be in either paper or digital format. We recommend you keep a back-up of all your digital records.

Understand your expenses before getting started

There are a number of rental expenses you may incur when preparing to buy a rental property. Not all of these expenses can be claimed in your tax return.

Borrowing expenses can be claimed as a deduction spread over 5 years, or the term of your loan – whichever is shorter. This includes things like:

• loan establishments costs
• title search fees
• lenders mortgage insurance.

Expenses that you can’t claim include:

• the amount you borrow to buy the property
• stamp duty charged by your state or territory government
• legal expenses, including solicitors' and conveyancers' fees for the purchase of the property.

Instead, you may be able to include these amounts in the cost base of your property. This can help you reduce the amount of Capital gains tax (CGT) you pay when you sell your property.

When you've bought the rental, but before it's tenanted

Before you rent your property, there may be existing damage that you want to repair.

Decisions on making repairs before your property is rented

If you do any work to repair damage that existed to your property when you first purchased it, these are called ‘initial repairs’. For example, scuffed walls or damaged floorboards.

These are capital expenses, and you can’t claim them as a deduction right away.

Initial repairs are part of the acquisition cost and included in the cost base of the property for CGT purposes, unless they're:

• capital works
• depreciating assets.

After your property is rented

When your property is rented, you’ll need to manage ongoing decisions about repairs, maintenance and improvements, and prepare for lodging your first tax return as an investor.

Know what income you will need to report

You must declare all the income you receive for your rental property in your tax return.

Some examples include:

• rental income you receive from tenants (including cash payments)
• bond money you retain (if tenants leave damage to your property)
• insurance payouts (whether for loss of rent, damage from a natural disaster, or another unexpected event).

Understanding repair, maintenance or improvement

You may incur some expenses to complete works on your rental property. For example, fixing a broken shower, replacing the carpet, or building a new fence.

If and how you can claim these expenses as deductions will depend on whether the work is a repair, maintenance, or improvement to your rental property.

Generally, if you:

• replace a part of something that is worn out, damaged or broken because of renting out the property, it's likely to be a repair
• do work to prevent deterioration or fix existing deterioration to keep the property in a tenantable condition, it's likely to be maintenance
• renovate, replace an entire structure that's partly damaged, or add a new structure to improve the property, it’s an improvement – and likely to be capital works.

Use our quick reference guide to work out the category of your rental property expense.

Lodging your first tax return as an investor

When you lodge your first tax return as an investor, you will need to make sure you have all your information available, including:

• all rental income you received
• dates that the property was rented
• evidence of all your expenses.

If you lodge with a tax professional, it’s best you speak to them as early as possible (for example, when you first buy a rental property). They can let you know exactly what details you will need, and which records you need to keep.

^{Authorised by the Australian Government, Canberra.}