Kalaro Guides · Property Tax

Rental Property Income and Expenses

What actually counts as rental income, what you can claim and when, and the specific areas the ATO looks at most closely when reviewing rental property claims.

All of itGross rent must be declared
1 Jul 2017Travel deductions ended for individuals
40 yrsTypical capital works period
By ownershipIncome and deductions follow legal share

What counts as rental income

You need to declare everything you receive from renting, leasing or licensing a property, including overseas properties, short-term and share-platform rentals, and arrangements with family or friends. This isn't limited to the rent cheque itself. It also includes:

  • Bond money you keep in place of rent, or retain because of property damage
  • Letting or booking fees you keep when a booking is cancelled
  • Insurance payouts for damage, an unexpected event, or loss of rent
  • Payments from a tenant to cover the cost of repairing damage
  • Government rebates for buying a depreciating asset, such as a solar hot water system
  • Payments in the form of goods and services, valued at their monetary equivalent

Income is declared in the year your tenant pays it to you, your agent, or your property manager, whichever happens first. It doesn't matter if your agent doesn't pass the money to you until the following year. You also declare rental income according to your legal ownership share, not according to who actually banks the money. A 50/50 tenants-in-common arrangement means each owner declares half the income and half the expenses, regardless of whose account the rent lands in.

What you can claim immediately

Provided the property is rented, or genuinely available for rent on commercial terms, you can generally claim a full deduction in the year you incur these costs:

  • Advertising for tenants
  • Body corporate administrative fund fees (the regular, day-to-day contributions, not special-purpose levies)
  • Council rates, water charges and land tax
  • Cleaning, gardening, lawn mowing and pest control
  • Insurance, including building, contents, public liability and loss of rent cover
  • Interest on the portion of a loan used to buy or improve the property
  • Property agent's fees and commission
  • Repairs and maintenance that relate to wear and tear during the rental period

Land tax is claimed in the year the liability relates to, not the year you happen to pay it, so an arrears assessment usually means amending a prior year's return rather than claiming it in the current one.

Repairs, maintenance and capital works: the distinction that matters most

This is where more rental deductions go wrong than anywhere else. Three categories look similar but are treated completely differently:

  • Repairs: fixing damage or deterioration that happened while the property was being rented out. Claimed in full, immediately. Replacing a cracked window pane or part of a broken fence are typical examples.
  • Maintenance: preventing deterioration or keeping the property in tenantable condition, such as repainting faded walls or servicing plumbing. Also claimed in full, immediately.
  • Capital works and improvements: anything that makes the property better, more valuable, or changes its character rather than simply restoring it, such as a bathroom remodel or a new deck. These are claimed over time as a capital works deduction, generally at 2.5% a year over 40 years.

Two traps sit inside this distinction. First, initial repairs, fixing a defect that already existed when you bought the property, are never an immediate deduction, even if you had no idea the defect existed at the time of purchase. They're capital, and they get added to the property's cost base for CGT purposes instead. Second, replacing an entire item, a hot water system, a whole fence, an entire toilet, is treated as a capital works or depreciating asset cost rather than a repair, even though replacing one broken part of that same item usually would be a repair.

Where this trips people up

If a contractor does repair work and capital improvement work in the same visit, for example painting damaged interior walls alongside a full render and repaint of the exterior, you can only claim the repair portion immediately if you can separate the two costs. Always ask for an itemised invoice that splits repair work from improvement work, or the whole job risks being treated as capital.

Legal and borrowing costs: mostly capital, with specific exceptions

Most legal costs connected to a rental property are capital, not deductible, and instead added to the CGT cost base. This includes solicitor's fees on purchase or sale, and costs of defending your title to the property. The exceptions that are deductible immediately are narrow and specific: evicting a non-paying tenant, taking court action to recover lost rental income, and defending a claim for injury suffered by someone on the property.

Borrowing expenses, such as loan establishment fees and the solicitor's fee for preparing loan documents, are deductible, but if the total is more than $100 they're spread over the life of the loan or five years, whichever is shorter, rather than claimed in one go.

Where the ATO is actually looking

A handful of areas draw disproportionate ATO attention because they're where the biggest gaps between what's claimed and what's allowed tend to show up.

Travel expenses to inspect or maintain the property

Since 1 July 2017, individual investors generally cannot claim any deduction for travel to inspect, maintain or collect rent from a residential rental property, full stop. This includes car costs, flights, accommodation and meals. It doesn't matter how far you travelled or how directly the trip related to the property. The only exceptions are taxpayers genuinely carrying on a business of letting rental properties, or specific entity types such as companies and certain trusts. Owning one or several properties as an individual investor does not meet that business threshold. Some promoters have incorrectly told clients they can still claim this; the ATO's guidance is explicit that they can't.

  • Below-market rentals to family or friends. If you rent to family below the market rate, the arrangement is treated as mixed private and income-producing use, and your deductions need to be apportioned. You generally can't create a loss beyond the rent actually received in this situation.
  • Mixed-purpose loans. Where borrowed funds are used partly for the rental property and partly for private purposes, interest must be apportioned and every future repayment applies proportionally across both portions, not selectively to whichever part you'd prefer to pay down. See our debt recycling guide for how this plays out with redraw facilities specifically.
  • Initial repairs claimed as immediate deductions. Fixing something that was already broken when you bought the property is one of the most common overclaims the ATO sees, precisely because it feels like an ordinary repair.
  • Declaring income to the wrong person. Rental income and deductions must follow legal ownership percentage, not who happens to manage the property or receive the bank transfers.

Frequently asked questions

Generally no, if you're an individual investor. This deduction was removed for residential rental properties from 1 July 2017 and now only applies to taxpayers genuinely in the business of letting properties, or to specific entity types like companies. It doesn't matter how directly the trip relates to a repair or inspection.

No. Whether you knew about the defect doesn't change its treatment. If the damage existed at the time you acquired the property, fixing it is an initial repair, which is capital in nature and added to your CGT cost base rather than claimed as an immediate deduction.

Not in full. Where rent is below market rate to family or friends, the ATO treats the arrangement as having both an income-producing and a private or domestic element, so deductions need to be apportioned. In most cases you can only reduce your rental income to nil, not create a loss from the arrangement.

This guide reflects ATO guidance current as at 2026, including TR 2026/1 (rental property income and deductions for individuals not in business), PCG 2026/2 (apportionment of rental property deductions) and PCG 2026/3 (holiday homes that are also rented out). It is general information only, doesn't take into account your personal circumstances, and shouldn't be relied on as tax advice. Confirm current thresholds and rulings before lodging, and keep records that support every deduction claimed.