Australian residential rental property tax

Australian residential rental property tax

Prepare a separate income and expense reconciliation for each property and each owner. This guide covers residential investment property held by individuals, using sources checked on 8 September 2026. Establish the income year, legal ownership, rental periods, private use and loan purposes before calculating deductions.

Reconcile gross income and ownership

Declare gross rent, including amounts received by an agent on the owner's behalf. Agent fees are a separate expense; reporting only the net bank deposit understates both income and expenses. Review retained bonds, insurance proceeds and reimbursements individually. Amounts replacing rent generally form rental income, but a payment for damage or a capital asset may need a different treatment.

Co-owners generally allocate income and expenses according to their legal interests. One owner paying the bills does not change those interests. A genuine partnership carrying on a rental business needs separate analysis. Domestic sharing of household costs is not automatically a commercial rental arrangement. ATO: rental income to declare.

• Declare gross rent — Declare gross rent, including amounts received by an agent on the owner's behalf. Agent fees are a separate expense; reporting only the net bank deposit understates both income and expenses. ([ATO: rental income to declare](https://www.ato.gov.au/individuals-and-families/investments-and-assets/property-and-land/residential-rental-properties/rental-income-you-must-declare))
• Co-owner allocation — Co-owners generally allocate income and expenses according to their legal interests. One owner paying the bills does not change those interests. ([ATO: rental income to declare](https://www.ato.gov.au/individuals-and-families/investments-and-assets/property-and-land/residential-rental-properties/rental-income-you-must-declare))

Establish the deductible use

Keep advertisements, agent agreements, booking records, lease terms and evidence of commercially realistic rent and tenant access. Apportion mixed expenses fairly for private use, the area rented and the relevant periods. Apply the allocation to each expense: advertising solely for tenants may be fully attributable to rent even where other costs need apportionment.

Some holding costs can qualify before the first tenant arrives where the property is held to produce income. Apply the vacant land restrictions and other specific exclusions before claiming construction-period costs. For a holiday home, section 26-50 can deny expenses associated with ownership or use unless it is used or held mainly to produce assessable income. Offering a few rental weeks does not establish that requirement. ATO: how to claim rental expenses.

• Holiday home — section 26-50 — For a holiday home, section 26-50 can deny expenses associated with ownership or use unless it is used or held mainly to produce assessable income. Offering a few rental weeks does not establish that requirement. ([ATO: how to claim rental expenses](https://www.ato.gov.au/individuals-and-families/investments-and-assets/property-and-land/residential-rental-properties/rental-expenses/how-to-claim-rental-expenses))

Classify expenses before adding them

Expense classification and treatment to check

Expense	Treatment to check
Agent fees, rates, insurance and ordinary administration	Generally deductible to the extent incurred in earning rental income
Loan interest	Trace the borrowed funds to their use; property security alone does not establish deductibility
Principal repayments	Not an income tax deduction
Repairs and maintenance	A deduction may apply for restoring deterioration arising during income-producing use; initial repairs and improvements are capital
Body corporate levies	Regular administration costs can qualify; special levies for capital work are not immediately deductible merely because they are levied
Borrowing costs	If total deductible borrowing expenses exceed $100, generally spread them over five years or the loan term, whichever is shorter
Acquisition and disposal costs	Check CGT cost base treatment rather than claiming them as annual rental expenses

For a mixed-purpose loan, private redraws create a private component. Repayments generally reduce both components proportionately; the owner cannot arbitrarily allocate every repayment to private debt. Interest follows use of the borrowed funds. ATO: interest expenses.

For repairs, identify the asset or entirety repaired, its condition when acquired, the cause of deterioration and what the work changed. Modern materials can restore an asset without turning every repair into an improvement. Separate repair and capital work on itemised invoices where possible. ATO: repairs and maintenance, ATO: common property expenses.

• Borrowing costs spreading threshold — If total deductible borrowing expenses exceed $100, generally spread them over five years or the loan term, whichever is shorter AUD

Separate plant from capital works

Division 40 concerns depreciating assets such as appliances. Establish each asset's cost, start date, effective life, method and income-producing use. Do not invent standard useful lives or apply a building rate to all contents.

Restrictions generally deny deductions for second-hand depreciating assets used in residential rental premises by individual investors. Check commencement and transitional rules and the exceptions, including qualifying new premises and specified entities or businesses. A new appliance bought by the owner is not automatically denied because the building itself is old. ATO: second-hand depreciating assets.

Division 43 concerns eligible construction expenditure. The rate and entitlement depend on the construction date, type and use; common rates are 2.5% or 4%. Use eligible construction cost, supported by records or a suitably qualified estimate, rather than the property's purchase price. Deductions generally start after construction is complete and the relevant income-producing use begins. Track capital works deductions for the later CGT calculation. ATO: capital expenses.

• Division 43 capital works — common rates — 2.5% or 4% % (The rate and entitlement depend on the construction date, type and use) ([ATO: capital expenses](https://www.ato.gov.au/individuals-and-families/investments-and-assets/property-and-land/residential-rental-properties/rental-expenses/capital-expenses))
• Second-hand depreciating assets restriction — Restrictions generally deny deductions for second-hand depreciating assets used in residential rental premises by individual investors. Check commencement and transitional rules and the exceptions, including qualifying new premises and specified entities or businesses. ([ATO: second-hand depreciating assets](https://www.ato.gov.au/individuals-and-families/investments-and-assets/property-and-land/residential-rental-properties/rental-expenses/depreciating-assets-in-rental-properties/second-hand-depreciating-assets))

Calculate the result and check a sale

For 2025–26 and 2026–27, an eligible rental loss can generally reduce other assessable income, subject to specific deduction and loss rules. A tax reduction is not necessarily an immediate cash refund, and depreciation deductions do not themselves represent cash paid that year.

From 2027–28, enacted rules restrict excess residential rental deductions, with exceptions and transitional treatment, including relevant interests acquired before 7:30 pm ACT time on 12 May 2026 and qualifying new dwellings. Apply the full conditions and carry-forward rules before modelling a later year. Treasury Laws Amendment (Tax Reform No. 1) Act 2026, Schedule 2. Subsequent amendments extend exceptions in specified circumstances and address the interaction with the first-income-use valuation rule. Treasury Laws Amendment (Tax Reform No. 2) Act 2026, Schedule 4.

For a sale, reconcile the contract date, proceeds, ownership shares, adjusted cost base and any main residence periods. Check foreign resident CGT restrictions where relevant. For property contracts from 1 January 2025, the withholding rate is 15% and there is no property value threshold. Australian-resident vendors need the appropriate clearance certificate before settlement; foreign residents may need a variation. Withholding is credited against final tax. ATO: foreign resident capital gains withholding.

• Rental loss offset 2025–26 and 2026–27 — For 2025–26 and 2026–27, an eligible rental loss can generally reduce other assessable income, subject to specific deduction and loss rules. (Treasury Laws Amendment (Tax Reform No. 1) Act 2026, Schedule 2)
• Excess residential rental deduction restriction from 2027–28 — From 2027–28, enacted rules restrict excess residential rental deductions, with exceptions and transitional treatment, including relevant interests acquired before 7:30 pm ACT time on 12 May 2026 and qualifying new dwellings. Subsequent amendments extend exceptions in specified circumstances and address the interaction with the first-income-use valuation rule. (Treasury Laws Amendment (Tax Reform No. 1) Act 2026, Schedule 2; Treasury Laws Amendment (Tax Reform No. 2) Act 2026, Schedule 4)
• Foreign resident capital gains withholding rate — 15% % (For property contracts from 1 January 2025; no property value threshold)

Contributed by Ryan Duguid.