Rental property deductions and negative gearing (ATO rules)

Positive and negative gearing today

According to the ATO, a rental property is positively geared when the deductible expenses are less than the rent (a profit), and negatively geared when they are more. Under the rules for the 2025–26 tax return, you claim the rental expenses against your rental income and your other income, such as salary, wages or business income. If your other income is not enough to absorb the loss, you can carry it forward to the next income year.

The ATO states that the negative gearing changes announced in the 2026–27 Federal Budget do not apply in the 2025–26 tax return. See what changes from 1 July 2027 below.

Expenses you can claim now

The ATO lists, among the expenses you can deduct in the year you incur them, provided the property is rented or available for rent on commercial terms:

• interest on the loan used to buy the property, or to buy depreciating assets, repair or renovate it while it is rented or held for rent;
• council rates, water charges and land tax (see land tax by state and council rates);
• regular body corporate administration fund and general sinking fund fees (see strata title and body corporate);
• insurance (building, contents, public liability, loss of rent);
• property agent’s fees and commission, advertising for tenants, cleaning, gardening, pest control;
• repairs and maintenance (see the next section);
• some legal expenses, such as evicting a non-paying tenant or taking court action for lost rent;
• depreciating assets costing $300 or less;
• quantity surveyor’s fees, mortgage discharge expenses and sharing economy platform fees.

You can only claim what you actually pay: water or electricity paid by the tenant is not your expense. The ATO also states that if a contractor does not give you an ABN, you may have to withhold 47% of the payment, and you may not be able to claim the expense if you did not withhold when required.

Interest and private use. If part of the loan is used for a private purpose (a car, a holiday, a redraw for personal spending), the interest must be apportioned between the rental and private parts. The ATO’s method is: total interest × (rental property loan ÷ total borrowings). The interest on a loan used to buy your new home is not deductible, even if that loan is secured against the former home you now rent out.

Prepaid expenses. Expenses under $1,000, and expenses of $1,000 or more covering a period of 12 months or less that ends in the next income year, can generally be deducted immediately. Longer prepayments are spread over the service period, up to 10 years.

Repairs, maintenance or improvements

The category decides when, and whether, you can claim. The ATO’s quick reference:

Improvements such as landscaping, insulating the house or renovating a kitchen or bathroom are not deductible as repairs. You can’t claim a repair if your insurer pays for it, and an insurance payout for work you already deducted must be included in your income. Defects you find when you buy are “initial repairs”, so a building and pest inspection before the purchase also tells you which costs will not be immediately deductible.

Capital works deductions (Division 43)

You can claim a deduction for the construction cost of the building, generally over 40 years from completion, once construction is complete and only for the periods the property is used to produce income. Your total deductions can’t exceed the construction cost.

Structural improvements started from 27 February 1992 are also deductible at 2.5%. The construction cost is not the purchase price, the insured cost or the replacement cost. If the records are missing, the ATO accepts an estimate from a quantity surveyor or another appropriately qualified person, and the fee is deductible. The ATO example: a townhouse built in 2005 for an estimated $500,000 gives $12,500 a year, and $4,178 for a first year in which it was rented 122 days.

Capital works deductions reduce the cost base of the property, which affects the capital gain when you sell: see capital gains tax and the main residence.

Second-hand assets: the 9 May 2017 rule

Fixtures and fittings that are depreciating assets (an oven, carpets, blinds) are claimed through their decline in value. Since 7:30pm AEST on 9 May 2017, an individual investor who is not carrying on a business can’t claim the decline in value of second-hand depreciating assets in a residential rental property. The ATO allows the deduction if:

• you bought the rental property before 7:30pm AEST on 9 May 2017, new or not;
• the asset is brand new, whether it came with a brand-new property or you bought it later for an existing one;
• you bought a property that is brand new or substantially renovated, no one claimed depreciation on the asset before, and either no one lived in it when you acquired it or you acquired it within 6 months of it being built or renovated.

Companies, super funds other than self-managed super funds and some trusts are excluded from the limit.

Travel and other costs you can’t claim

Travel. From 1 July 2017, you can’t deduct the cost of travel relating to a residential rental property (car, airfare, accommodation and meals to inspect, maintain or collect rent) unless you are in the business of letting rental properties or an excluded entity, such as a company. The ATO states that owning one or several rental properties is generally an investment, not a business. You also can’t claim travel to inspect a property before you buy it, in Australia or overseas, or seminars on finding a property to invest in.

Purchase and sale costs. The purchase price, conveyancing, stamp duty on the transfer, buyer’s agent fees and the agent’s commission on the sale are not deductible. They may form part of the property’s cost base for capital gains tax.

Borrowing expenses. Loan establishment costs, such as a solicitor’s fees for preparing loan documents, are claimed over the life of the loan or 5 years, whichever is less, when they total more than $100.

Vacant land and vacant property taxes. Since 1 July 2019, the costs of holding vacant land (interest, rates, land tax) are generally not deductible, with exceptions for businesses and excluded entities. The 2026 guide adds that a vacant property tax is not generally deductible, while a state levy on short-stay rentals is.

Part rental, holiday homes and rent below market

• Part of the year or part of the home. Expenses are apportioned by time (days rented or genuinely available for rent ÷ days owned) and, if you rent out only part of the home, by area: [sole-use area + (common areas ÷ 2)] ÷ total area. A room in your own home counts only for the days it is actually rented.
• Holiday homes. If you or your family and friends use the property for holidays, the ownership and use expenses (interest, rates, body corporate fees, land tax, repairs) are deductible only if the property is used or held for use mainly to produce rental income, judged on facts such as availability in peak seasons. Fees incurred only when it is rented (platform commission, cleaning after guests) remain deductible.
• Rent below market to family or friends. If the rent is assessable, the ATO considers it fair to limit your deductions to the rent received, so there is no net loss. At market rent, no apportionment is needed, but keep evidence of how the rent was set (a rent appraisal or comparable listings).

Records to keep

Each expense record must show the supplier’s name, the amount, the nature of the goods or services, the date the expense was incurred and the date of the document. Keep rental records for 5 years from 31 October or, if you lodge later, from the date you lodge, and longer if a dispute with the ATO is under way. Keep loan documents and redraw records: for a loan used for both private and rental purposes, the ATO requires records accurate enough to separate the interest.

What changes from 1 July 2027

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received assent on 26 June 2026. According to the ATO, from 1 July 2027:

• negative gearing for residential property investments is limited to new builds;
• the 50% capital gains tax discount for individuals, trusts and partnerships is replaced by cost base indexation with a 30% minimum tax on capital gains.

Properties held at announcement (7:30pm AEST, 12 May 2026) are exempt from the negative gearing change, and the CGT change applies only to gains accruing after 1 July 2027. The Treasurer’s second reading speech on the bill described the mechanism: for an existing residential property bought after that time, losses would only be deductible against other income from residential property, including capital gains, and excess losses could be carried forward to future years; dwellings built on vacant land, and existing properties demolished and replaced with a greater number of dwellings, were given as examples of new builds. Payotte read the speech, not the full text of the Act as passed, so confirm the final definitions with the ATO or a tax agent before buying.

Which professional to consult

A registered tax agent can sort expenses into the right category, apportion interest on a mixed loan and tell you how the 2027 rules apply to your purchase date. Check that the agent is listed on the Tax Practitioners Board register. A quantity surveyor prepares the capital works and depreciation schedule; a property valuer can document market rent or value; a mortgage broker can keep investment and private borrowing in separate loans.