Investment property offers one of the broadest deduction profiles of any individual investment type in Australia. Interest on the loan, depreciation on the building and fittings, and all holding costs reduce taxable income each year. This guide covers the deduction strategy from purchase through to sale.
Year of Purchase — What You Can and Cannot Claim Immediately
In the year you buy an investment property, some costs are deductible and others go to your cost base (affecting CGT when you eventually sell):
| Cost | Tax treatment |
|---|---|
| Stamp duty | Capital — added to CGT cost base |
| Conveyancing and legal fees | Capital — added to CGT cost base |
| Building and pest inspection fees | Capital — added to CGT cost base |
| Loan establishment fees | Capital — may be amortised over the loan term |
| Borrowing costs > $100 (over loan term) | Amortised over 5 years or loan term, whichever is shorter |
| First period of interest (from settlement to end of financial year) | Deductible in year incurred — if property is available for rent |
| Initial repairs (pre-existing defects at purchase) | Capital — not immediately deductible |
Ongoing Annual Deductions — The Full Picture
See the full rental property deductions list for every line item. The most financially significant annual deductions:
1. Loan Interest
The largest deduction for most leveraged property investors. Only the interest component of repayments is deductible — not the principal. If you have an interest-only loan, 100% of each payment is interest (and deductible). If you have a principal-and-interest loan, only the interest portion is deductible (the principal reduces the loan balance, not your tax).
2. Depreciation — Building (Division 43)
Buildings built after 17 July 1985 can be depreciated at 2.5% of the original construction cost per year. For a property built for $300,000, that is $7,500 per year in non-cash deductions. The depreciation schedule continues until the pool is exhausted (40 years).
3. Depreciation — Plant and Equipment (Division 40)
Appliances, hot water systems, carpets, and blinds depreciate at their own rates. The ATO publishes effective lives. A $1,500 air conditioning unit with a 10-year effective life gives $150/year in deductions.
Restriction for used properties: Investors who bought existing properties after 7 May 2017 can no longer depreciate the second-hand plant and equipment items that came with the property at purchase. New items installed after purchase are fully depreciable.
4. Management Fees and Agency Costs
Property managers typically charge 7–10% of rent collected (plus GST). On a property renting at $600/week ($31,200/year), management fees may be $2,184–$3,120 per year.
5. Borrowing Costs
If total borrowing costs exceeded $100 when you took the loan, they are amortised over 5 years. Common borrowing costs: lender’s mortgage insurance (LMI), loan application fee, valuation fee for loan purposes.
Negative Gearing — How It Works
When total deductions (interest + depreciation + holding costs) exceed rental income, the net loss is negative gearing. That loss reduces your other income:
| Item | Amount |
|---|---|
| Rental income | $24,000 |
| Interest | -$28,000 |
| Depreciation (Div 43 + Div 40) | -$9,500 |
| Other holding costs | -$4,000 |
| Net rental result | -$17,500 loss |
If your salary income is $90,000, the $17,500 net rental loss reduces your taxable income to $72,500. At the 32.5% marginal rate, this saves approximately $5,687 in tax in the year.
The strategy requires that the after-tax holding cost, combined with expected capital growth, produces an adequate total return. The tax benefit does not eliminate the cash flow cost — it partially offsets it.
When the Property Is Partially Private Use
If you or a family member live in the property for some of the year:
- All expenses must be apportioned between the rental period and the private period
- Expenses during private occupancy are not deductible
- Capital gains on the property may lose partial main residence CGT exemption
Year of Sale — CGT
When you sell the property:
- Capital gain = sale proceeds minus cost base
- Cost base includes: purchase price, stamp duty, conveyancing, capital improvements, plus some holding costs not previously deducted
- Cost base is reduced by any capital works (Division 43) deductions claimed — this reduces the cost base and increases the capital gain at sale
- The 50% CGT discount applies if held for more than 12 months
Record-Keeping for Investment Property
Keep records for five years from the later of sale and lodgement, and preserve purchase records indefinitely (they form the cost base). Records needed:
- Loan statements (interest breakdown each year)
- All rental income receipts and agent statements
- All expense receipts
- Quantity surveyor’s depreciation schedule
- Settlement statement from purchase (purchase price and initial costs)
Frequently Asked Questions
Should I get an interest-only loan for an investment property? This is a financial decision — interest-only loans maximise the deductible interest (none of the payment is non-deductible principal). However, the loan is not being reduced during the IO period, and interest rates on IO loans are often higher. This involves trade-offs that go beyond tax — seek financial advice.
My property sat vacant for three months while I waited for a tenant. Can I claim during that time? Yes, if the property was genuinely listed and available for rent. Maintain evidence of the listing (screenshots of the real estate portal listing, agent communications) to support the claim.
What is the dollar value of depreciation on a typical investment property? A reasonable estimate for a three-bedroom established property built in the 1990s–2000s: $3,000–$8,000 per year in combined Division 40 and 43 deductions. New properties typically offer higher first-year depreciation.
This article provides general tax information. For advice tailored to your situation, speak with a registered tax agent. Find one through the Tax Practitioners Board register.