What you can claim, what you can't, and the records you need for an investment property.
Rental income isn't just the rent you receive — it also includes any bond money you keep because a tenant defaulted, insurance payouts for lost rent, and any letting or booking fees charged to the tenant. All of it needs to be declared, even if it's not sitting in your regular bank account.
Repairs (fixing something that broke, restoring it to its original condition) are immediately deductible in full. Improvements (replacing something with a better version, or adding something new) are capital in nature and must be depreciated over time, not deducted immediately.
For example, replacing a few broken roof tiles is a repair. Replacing the entire roof with a better one is a capital improvement. This distinction catches out a lot of investors, since both feel like "fixing the property" but are treated completely differently at tax time.
Claimed at 2.5% per year over 40 years (or 4% over 25 years for some older construction categories) based on the original construction cost — not what you paid to buy the property. This applies regardless of when you purchased the property, as long as construction began after 15 September 1987.
Items like carpets, blinds, and appliances depreciate faster, over their individual effective life. However, since 9 May 2017, if you bought an established (second-hand) residential property, you can no longer claim depreciation on plant and equipment that came with the property — only on new items you personally purchase and install afterward. This rule doesn't affect capital works deductions on the building itself.
| Depreciation type | Rate / basis |
|---|---|
| Capital works (building) | 2.5% per year over 40 years (or 4% over 25 years, where applicable) |
| Plant & equipment (new, installed by you) | Effective life set by the ATO for each asset type |
| Plant & equipment (second-hand, came with an established property bought after 9 May 2017) | Not deductible |
If your deductible expenses exceed your rental income, the resulting loss can generally offset your other income (like salary), reducing your overall tax bill. This is what people mean by "negative gearing" — it's not a special concession, just the normal outcome of a loss-making investment being offset against other income.
Costs directly related to setting up your loan — like loan establishment fees, lender's mortgage insurance, and title search fees — are deducted over 5 years or the loan term, whichever is shorter, rather than all at once.
Any capital works depreciation you've claimed over the years reduces your property's "cost base" when you eventually sell — which increases your taxable capital gain at that point. This is a genuinely common trap: people forget that depreciation claimed today has a tax consequence down the track, not just a benefit now.
Keep records for at least 5 years from the date you lodge the tax return that relies on them — this includes purchase documents, loan statements, receipts for repairs, and depreciation schedules. For depreciation specifically, a quantity surveyor's report is the standard way to substantiate a claim.
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