You can claim an immediate deduction for these expenses in the income year you incur them. To claim a deduction you must actually incur the cost. You can't claim a deduction where the cost is paid by the tenant.
If your property is negatively geared, you may be able to deduct the full amount of rental expenses against your rental and other income – such as salary and wages and business income.
There are some rental expenses that you must claim over several years – for example, capital works and borrowing expenses.
Expenses that you can claim an immediate deduction for may include:
- advertising for tenants
- body corporate administrative fund fees and charges
- council rates, water charges, land tax
- cleaning, gardening and lawn mowing
- pest control
- insurance (building, contents, public liability, loss of rent)
- interest expenses
- pre-paid expenses
- property agent's fees and commission
- repairs and maintenance
- legal expenses.
For more information, see Rental properties guide.
Body corporate fees are a cost you pay to the body corporate or strata to manage the property and maintain common areas. 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.
These fees and charges may go towards payments to:
- cover the cost of day-to-day expenses to maintain and manage the building – for example, insurance premiums, maintenance of gardens and management of the body corporate itself
- a special purpose fund, for a specific expense – for example, roof repairs and building insurance.
Regular payments you make to body corporate administration funds or general purpose sinking funds for ongoing administration and general maintenance are considered to be payments for the provision of services by the body corporate. You can claim an immediate deduction for these regular payments at the time you incur them.
If you are required by the body corporate to pay a special levy to fund a particular capital improvement, these levies are not deductible. You may be able to claim a capital works deduction for the cost of capital improvements or repairs of a capital nature once the work is completed over a period of time. The cost must also be charged to either the special purpose fund or the general purpose sinking fund, if a special contribution has been levied.
For a summary fact sheet of what you can and can't claim that you can download as a PDF see, Rental properties – body corporate fees and charges.
Charges on the principal amount of the loan that you take out for a rental property are known as interest expenses. The principal amount is the money you borrow from your bank or lender.
If you take out a loan to purchase a rental property, you can claim a deduction for the interest charged on the loan or a portion of the interest.
You can't claim a deduction for the additional payments you make to reduce the principal amount of the loan.
The property must be rented or available for rent in the income year you are claiming a deduction for the interest expenses.
Watch: Claiming interest expenses
Media: Claiming interest expenses
https://tv.ato.gov.au/ato-tv/media?v=bd1bdiun85itf1External Link (Duration: 02:21)
For a summary fact sheet of what you can and can't claim that you can download as a PDF see, Rental properties – interest expenses.
Interest expenses you can claim
You can claim the interest charges on the loan (mortgage) you use to:
- buy a rental property
- buy a depreciating asset for the rental property (for example, an air conditioner for the rental property)
- make repairs to the rental property (for example, roof repairs due to storm damage)
- finance renovations and extensions to the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property).
You can also claim interest expenses when:
- you have pre-paid interest expenses up to 12 months in advance
- you're repairing damage to your rental property, making it uninhabitable while the repairs are taking place.
Example: claiming all interest incurred
Kosta and Jenny take out an investment loan for $350,000 to purchase an apartment they hold as joint tenants.
They rent out the property for the whole of the year from 1 July. They incur interest of $30,000 for the year.
Kosta and Jenny can each make an interest claim of $15,000 on their respective tax returns for the first year of owning the property.End of example
Interest expenses you can't claim
You can't claim a deduction for interest expenses you incur:
- for any period you used the property for private purposes, even if it's a short period of time
- on the portion of the loan you use for private purposes (for example, money you use to purchase a new family car), either when
- you took out the loan
- you refinance the loan
- on a loan you used to buy a new home if you don't use the new home to produce income, even if you use your rental property as security for the loan
- on any portion of the loan you use for private purposes, even if you are ahead in your repayments.
Example: claiming part of the interest incurred
Yoko takes out a loan of $400,000 and uses the loan to:
- buy a rental property for $380,000
- buy a new car for $20,000 for private use.
Yoko rents her property for the whole year from 1 July. Her total interest expense on the $400,000 loan is $35,000.
Yoko works out how much interest she can claim as a deduction, using the following calculation:
Total interest expenses × (rental property loan ÷ total borrowings) = deductible interest
$35,000 × ($380,000 ÷ $400,000) = $33,250
Yoko can claim an interest expense deduction of $33,250.
The ratio between the deductible and private components of the loan is 95/5. Yoko must continue to apportion interest in accordance with this ratio for the life of the loan. Similarly, any repayments of principal are applied in the same ratio.End of example
If you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals and is used for both private purposes and rental property expenses, you must keep accurate records to enable you to calculate the interest that applies to the rental property portion of the loan.
You can't repay only the portion of the loan that relates to the personal purchase. Any repayments of the loan are apportioned across both purposes.
You must also separate the interest that relates to the rental property from any interest that relates to the private use of the fund.
For apportionment calculations in these situations, see paragraphs 19 and 20 of TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities.
Example: interest incurred on a mortgage for a new home
Zac and Lucy take out a $400,000 loan secured against their existing home to purchase a new home.
Rather than sell their existing home, they decide to rent it out.
They have a mortgage of $25,000 remaining on their existing home which is added to the $400,000 loan under a loan facility with sub-accounts – that is, the two loans are managed separately but are secured by the one property.
Zac and Lucy can claim an interest deduction against the $25,000 loan for their original home, as it is now rented out.
They can't claim an interest deduction against the $400,000 loan used to purchase their new home as it's not being used to produce income even though the loan is secured against their rental property.End of example
Example: interest incurred on fund redrawn from the loan halfway through the year
Tyler has an investment loan for his rental property with a redraw facility. He is ahead on his repayments by $9,500 which he can redraw. Halfway through the year, Tyler redraws the available amount of $9,500 and buys himself a new TV and a lounge suite.
The outstanding balance of the loan after the redraw increases to $365,000 and total interest expense incurred immediately before the redraw is $9,300. The total interest on $365,000 for the year is $19,000.
Tyler can only claim the interest expense on the portion of the loan relating to the rental property using the following calculations:
Total loan balance − redraw amount = rental property loan portion
$365,000 − $9,500 = $355,500
To work out how much interest he can claim, he does the following calculation in respect of the period following the redraw:
Total interest expenses × (rental property loan portion ÷ loan balance at the time of the redraw) = deductible interest
$9,700 × ($355,500 ÷ $365,000) = $9,448
Tyler can claim interest of $18,748, being $9,300 plus $9,448.
The ratio between the deductible and private components of the loan is 97.4/2.6. Tyler must continue to apportion interest and repayments of principal in accordance with this ratio for the life of the loan.End of example
Thin capitalisation rules may affect you if the combined debt deductions (for example, interest) of you and your associated entities are more than $2 million in any income year and you are:
- an Australian resident and you (or any associated entities) have
- certain international dealings
- overseas interests
- a foreign resident (or associated entity) with certain investments in Australia.
You must consider the thin capitalisation rules each year.
A pre-paid expense is a cost you incur under an agreement for services to be done (in whole or in part) in a later income year. For example, payment of an insurance premium on 1 January that provides cover for the entire calendar year or interest on money you borrow.
You can generally claim an immediate deduction in the income year you make the prepayment for:
- expenses of less than $1,000
- expenses of $1,000 or more where the service period is 12 months or less (such as payment of an annual insurance premium part way through an income year).
The service period is the period during which the thing is to be done under the agreement in return for the expenditure.
The eligible service period begins on the later of either:
- the day the thing under the agreement begins to be done
- on the day the expenditure is incurred.
A pre-paid expense that doesn't meet these criteria may have to be spread over two or more years.
You work out the part of your pre-paid expenses over the shorter of either:
- the eligible service period
- 10 years.
For more information, see Deductions for prepaid expenses.
Repair and maintenance expenses are those costs you incur to:
- keep your property in a tenantable condition
- fix wear and tear or damage that occurs as a result of renting out your property.
To be a deductible expense, the property must either:
- continue to be rented on an ongoing basis
- remain available for rent, even if there is a short period where the property is unoccupied – for example, unseasonable weather causes cancellations of bookings or all reasonable efforts to attract tenants were unsuccessful.
You can claim a deduction for repair and maintenance expenses in the income year you incur them.
You can't claim an immediate deduction for expenses that are capital or of a capital nature as repairs and maintenance. These expenses are capital expenditure or improvements, that you claim over several years. For example, replacement of an entire structure such as a fence or initial repairs such as defects that existed at the date you acquired the property.
Watch: Getting repairs and capital works right
Media: Getting repairs and capital works right
https://tv.ato.gov.au/ato-tv/media?v=bd1bdiun85itx8External Link (Duration: 02:32)
What you can claim immediately
You can claim a deduction for repair and maintenance expenses in the income year you incur them.
Repairs are work to make good or remedy defects in, damage to or deterioration of the property. Generally, repairs must relate directly to wear and tear or other damage that occurred as a result of renting out the property.
If the repairs relate to remedying damage that existed when you acquired the property, these are initial repairs and you can't claim an immediate deduction.
Examples of repairs you can claim include:
- replacing broken windows
- replacing part of the gutter damaged in a storm
- replacing part of a fence damaged by a falling tree branch
- repairing electrical appliances or machinery.
If you no longer rent the property, you may still be able to claim repair expenses where both:
- the need for repairs relates to a period where the property was income producing
- the property was income producing during the income year you incur the expenses.
Repairs versus improvements
If you conduct a project that includes both repairs and improvements to your property, you can only claim a deduction for the cost of your repairs if you can separate the cost of the repairs from the cost of the improvements.
An improvement is anything that makes an aspect of the property better, more valuable, more desirable or changes the character of the item on which works are being carried out (for example, a renovation).
If you hire a builder or other professionals to carry out these works for you, we recommend you ask for an itemised invoice to help work out your claim.
Example: apportioning expenses between repairs and improvements
Caitlin has modernised her rental property by hiring tradespeople to render and paint the external walls. She also asked the painter to paint the internal walls, which had deteriorated during the time she rented out the property.
As Caitlin requested an itemised invoice from the painter, she could separate the cost of the internal and external painting, and rendering. Due to this, she could claim an income tax deduction for the cost of painting the internal walls as a repair. She could claim the costs for the external walls as capital works deductions.End of example
Maintenance means work to prevent deterioration or fix existing deterioration. Maintenance generally involves keeping your property in a tenantable condition.
Examples of maintenance include:
- repainting faded or damaged interior walls of a rental property
- oiling, brushing or cleaning something that is otherwise in good working condition – for example, oiling a deck or cleaning a swimming pool
- maintaining plumbing.
You need to claim a deduction for certain repair, maintenance and improvement expenses over several years.
Repairs and maintenance unrelated to wear and tear or damage
You can't claim the total costs of repairs and maintenance in the year you paid them if they did not relate directly to wear and tear or other damage occurring due to renting out your property. These are capital expenses you may be able to claim over several years as capital works deductions or deductions for decline in value.
You can't claim a deduction for the total cost of improvements to your rental property in the year you incur them.
Capital improvements (such as remodelling a bathroom or adding a pergola) should be claimed as capital works deductions.
Improvements means work that:
- provides something new
- generally furthers the income-producing ability or expected life of the property
- goes beyond just restoring the efficient functioning of the property.
Improvements can be either capital works where it is a structural improvement or capital allowances where the item is a depreciating asset.
Example: property improvements
Tim replaced a fibre cement sheeting wall inside his property because it was damaged by tenants. He replaced the old wall with a brick feature wall.
The new wall is an improvement because Tim did more than just restore the efficient function of the wall. This means Tim can't claim the cost of the new wall as a repair, but he can claim it as capital works deductions.
However, had Tim replaced the fibro with a current equivalent, such as plasterboard, he could have claimed his costs as a repair. This is because it would have merely restored the efficient function of the wall without changing its character, even though a different material was used.End of example
Rental property legal expenses are those costs you incur to prepare, register, protect and manage your rental property.
You can claim a deduction for some of the legal expenses you incur to produce your rental income. You can claim these expenses in the income year you incur them.
Legal expenses you can claim
You can claim the cost of the following as income tax deductions:
- evicting a non-paying tenant
- expenses incurred in taking court action for loss of rental income
- defending a claim for damages arising from injuries suffered by a third party on your rental property.
Legal expenses you can't claim
Most legal expenses you incur for a rental property or holiday home are of a capital nature. You can't claim the cost of the following as income tax deductions:
- solicitor's fees for the purchase of the property (these are a capital expense)
- solicitor's fees for the preparation of loan documents (these can be claimed as borrowing expenses)
- legal costs associated with resisting land resumption (these are a capital expense)
- legal costs associated with defending your title to the property (for example, defending an action by the mortgagee to take possession of the property where you have defaulted under the loan – these are a capital expense).
Legal expenses which are capital in nature may form part of the cost base of your property for capital gains tax (CGT) purposes when you sell the property.
For more information about how tax applies to rental properties, see:
It is important to correctly categorise each expense you incur to ensure it is treated correctly for tax purposes. Our quick reference guide in the table below will help you to work out which category your expense relates to.
Replacing something that is worn out, damaged or broken as a result of renting out the property
Replacing part of a fence damaged in a storm
Repair and maintenance
Preventing or fixing deterioration of an item that occurred while renting out the property
Repainting faded interior walls
Repair and maintenance
Repairing damage that existed when the property was bought (whether it was known at the time of purchase or not)
Fixing floorboard or repairing deteriorated window frames and the damage existed when the property was bought
Replacing an entire structure that is only partly damaged
Replacing all the fencing, not just the damaged portion
Renovating or adding a new structure to the property
Adding a carport
Installing a brand new appliance, floor or window covering
Buying a new dishwasher
For more information, see Rental expenses you claim over several years.Check the deductions you can claim in the income year you incur the expense for your rental property.