Rental Property Tax: Repairs, Depreciation and Negative Gearing

Owning a rental property turns you into a small business owner for tax purposes, whether or not it feels like one. The rent is income, many costs are deductible, and the distinction between a repair, an improvement and a capital item decides whether you claim something now, over many years, or only when you sell.

What counts as rental income

Rental income is more than the weekly rent. It generally also includes bond money you retain to cover unpaid rent or damage, insurance payouts for lost rent, letting and booking fees you charge, and amounts a tenant pays you for repairs. If you co-own the property, income and most expenses are usually split in line with your legal ownership interest, not by private agreement.

The ATO's rental properties guide is the definitive starting point and is updated each year. Find it from ato.gov.au/individuals-and-families under investments and assets.

Deductions you can generally claim now

For a property that is rented, or genuinely available for rent, many running costs are deductible in the year you incur them:

• interest on money borrowed to buy or improve the property (not interest on the portion of a loan used for private purposes);
• council rates, water charges and land tax;
• property management and letting fees;
• landlord insurance;
• body corporate fees for administrative and general purpose funds;
• cleaning, gardening, pest control and advertising for tenants;
• repairs and maintenance that restore something to its previous condition.

Borrowing expenses, such as loan establishment fees, are generally claimed over several years rather than all at once, subject to the ATO's rules.

Repairs, improvements and initial repairs

This distinction is where many landlords go wrong. A repair fixes damage or wear and tear from the time you have been renting the property, restoring it to its previous state, and is usually deductible immediately. An improvement makes the property better than it was, such as replacing a laminate kitchen with stone benchtops, and is a capital cost. An initial repair fixes defects that existed when you bought the property, and is also capital, even though it looks like a repair.

Capital costs aren't lost. Structural improvements may qualify for capital works deductions spread over many years, and some costs form part of the property's cost base for capital gains tax when you eventually sell.

Depreciation: capital works and plant

There are two kinds of depreciation for rental property. Capital works deductions apply to the building's structure and structural improvements, spread over a long period at a rate set by law, depending on when construction started. Decline in value applies to depreciating assets such as appliances, carpets and blinds, based on each asset's effective life.

For residential rentals, there are restrictions on claiming decline in value for previously used depreciating assets, for example appliances that came with an established property you bought. Whether you can claim depends on when and how the property and assets were acquired. Many investors use a quantity surveyor's depreciation schedule to identify capital works and assets; the fee for the schedule is generally deductible.

Ask one question of every property cost: does this restore what was already there during my ownership, or does it make the property better or fix something I bought broken? The answer decides the year you claim it.

How negative gearing works

A property is negatively geared when its deductible expenses, including interest and depreciation, are greater than the rent it earns. The resulting net rental loss can generally be deducted against your other income, such as salary, which reduces your overall taxable income.

Negative gearing is not a strategy in itself; it is a description of a loss. You are still out of pocket on the property each year, and the tax saving only offsets part of that loss. The underlying bet is usually that the property's value will grow enough to justify the yearly losses, and that growth is far from guaranteed. If the property becomes positively geared, the net rental income is added to your taxable income instead.

A year in the life of a rental: what to record

A simple annual rhythm keeps a rental property's tax affairs manageable:

1. Monthly: save the property manager's statement, which usually lists rent received, fees deducted and any repairs paid on your behalf.
2. As they happen: keep invoices for every repair, noting what was fixed and whether the damage occurred during your ownership. A photo before and after helps if the repair is ever questioned.
3. Each year: obtain your loan's annual interest statement. If the loan also funds anything private, keep the records needed to split the interest.
4. For any works: decide at the time whether the job is a repair, an improvement or an initial repair, and file the paperwork accordingly. Improvements also matter for your CGT cost base later.
5. At year end: confirm periods when the property was vacant, and evidence that it was advertised at market rent during those periods.

Pre-filled data in myTax may include some rental information reported by third parties, but much of a rental schedule comes from your own records. The year-end statement from a property manager is a summary, not a substitute for the underlying invoices.

Common restrictions and traps

• Travel. Travel to inspect, maintain or collect rent for a residential rental is generally not deductible for individual investors.
• Private use. If you or friends use a holiday home, or it isn't genuinely available for rent, you can only claim expenses for the periods it is rented or genuinely available, and must apportion.
• Below-market rent to family. Renting to relatives at less than market rent can limit your deductions.
• Refinancing. Interest is deductible based on what the borrowed money is used for, not what secures the loan. Redrawing for private purposes muddies the claim.
• Vacant land. Holding costs for vacant land are restricted in many cases.

Frequently asked questions

Can I claim interest if the property was empty for a while?

Generally yes, if the property was genuinely available for rent during that time: advertised at a market rent, with reasonable conditions. If it was not genuinely available, the expenses for that period may not be deductible.

Do capital works deductions affect capital gains tax later?

Yes. Capital works deductions you have claimed, or could have claimed, generally reduce the property's cost base, which can increase the capital gain when you sell.

Is a depreciation schedule necessary?

Not legally, but without one it can be hard to identify the construction costs and assets you are entitled to claim. The fee is generally deductible.