Most investors know interest is deductible. The difference between an average return and a well-constructed one is usually found in the deductions most people miss — and in the expenses people wrongly claim.
The two questions that decide deductibility
An expense on an investment property is deductible when it passes two tests:
- Income-producing purpose. The outlay relates to earning rental income (or maintaining an asset that produces it).
- Not capital in nature. The outlay keeps the property running; it does not improve or extend the asset itself.
Repair a broken hot water system and it is a deduction. Replace the entire roof because you want a better building — that is capital, added to your cost base for capital gains tax instead. The boundary between repair and improvement is where most errors happen.
The deductible checklist
| Expense | Deductible? |
| Loan interest | Yes — the single largest deduction |
| Property management fees | Yes |
| Council rates and water rates | Yes |
| Strata / owners corporation fees | Yes |
| Land tax | Yes |
| Building and contents insurance | Yes |
| Repairs and maintenance | Yes — repairs, not improvements |
| Pest control | Yes |
| Advertising for tenants, lease fees | Yes |
| Bank charges and loan account fees | Yes |
| Borrowing costs (lender fees, mortgage stamp) | Yes — spread over five years or the loan term |
| Depreciation — capital works (Division 43) | Yes — non-cash, 2.5% per year on structural value |
| Depreciation — plant and equipment (Division 40) | Yes — non-cash; depends on your ownership date |
General summary, not advice. Your circumstances — including the date you bought the property and whether it was new or established — change what applies.
What is not deductible
- Principal repayments. Real cash out, zero tax benefit. This is the biggest gap between cash loss and taxable loss.
- Capital improvements. A new deck, extension or renovated kitchen is added to the cost base, not claimed as an expense (capital works depreciation may apply separately).
- Stamp duty and purchase costs. These build the cost base for capital gains tax.
- Initial repairs on a property you just bought. If it was run down at purchase, the first repair is treated as capital in many cases.
- Private use. If you or family stay in the property, that portion is not deductible.
The surprises most investors miss
Depreciation is real, but it is not cash
Capital works deductions (typically 2.5% a year on the structural value of post-1987 buildings) and plant depreciation reduce your taxable income without taking money out of your account. A quantity surveyor can prepare a depreciation schedule for a few hundred dollars — often the highest-returning purchase an investor makes. The same property does different things to different owners.
Borrowing costs are spread, not claimed upfront
Loan establishment fees and mortgage stamp duty are deductible in equal amounts over five years (or the loan term, whichever is shorter).
Inspecting the property
Travel to inspect a rental property is no longer deductible for most investors (removed from 1 July 2017). Factor that into your management cost assumptions.
Cash loss and taxable loss are different numbers. Principal repayments are cash out but not deductible. Depreciation is deductible but not cash out. Model both before you decide a property "works".
A worked example
The same property with identical cash expenses produces a different taxable loss depending on depreciation and borrowing costs. Here is the full-year picture used across this site.
| Rent received (50 occupied weeks) | $32,500 |
| Interest | $45,000 |
| Property management, rates, insurance, repairs | $9,600 |
| Cash expenses total | $54,600 |
| Cash result | -$22,100 |
| Plus capital works depreciation (non-cash) | -$3,600 |
| Taxable rental result | -$25,700 |
| Illustrative tax effect at 37% marginal rate | $9,509 |
| After-tax weekly contribution | $242 |
Illustrative. Run your own numbers in the negative gearing calculator.