Investment Property Tax Deductions 2026: Complete ATO Guide

Last updated: August 2026 | Reading time: 14 min

📋 Quick Summary — Investment Property Tax Deductions 2026

ATO ruling (new)	TR 2026/1 — finalised May 2026, clarifies rental income and deductions
Immediately deductible	Loan interest, council rates, insurance, repairs, property management fees
Deductible over time	Capital works (2.5%/yr), plant & equipment depreciation
Not a rental deduction	Purchase price, transfer stamp duty, loan principal, private-use expenses
Travel expenses	Not deductible since 1 July 2017 (residential property)
Negative gearing change	Established properties bought after 12 May 2026 — losses quarantined from 1 July 2027
Plant & equipment (Div 40)	Restricted for established properties purchased after 9 May 2017

Investment property tax in Australia is genuinely complex. Some rental expenses can be claimed in the year they are incurred, others are claimed over time, and some are not rental deductions at all. The 2026 Budget reforms also mean your purchase date and property type can affect how rental losses are treated from 1 July 2027. Here's the complete picture.

The Three Categories — How ATO Divides Deductions

The ATO broadly groups rental property expenses by when or whether you can claim them: some may be immediately deductible, some are claimed over several years, and some are not deductible against rental income.

Category 1

✅ Immediately Deductible

Loan interest
Council rates & land tax
Insurance premiums
Property management fees
Repairs and maintenance
Advertising for tenants
Cleaning costs
Gardening & lawn mowing
Pest control
Accounting fees
Eligible body corporate administrative and general-purpose fund fees
Eligible tax depreciation schedule fee
Water charges (if paid by owner)

Category 2

⏳ Deductible Over Time

Capital works / building (2.5%/yr — Division 43)
Plant & equipment depreciation (Division 40)
Borrowing costs over 5 years or the loan term, whichever is shorter
Eligible capital improvements through capital works deductions

Category 3

❌ Not a Rental Deduction

Purchase price of the property
Transfer stamp duty on purchase (generally part of CGT cost base)
Loan principal repayments
Expenses for private use periods
Travel to inspect property (since 1 July 2017)
Many costs of acquiring or disposing of the property (often relevant to CGT instead)

Immediately Deductible Expenses — In Detail

Loan Interest — The Biggest Deduction

Interest on a loan used to purchase, repair or renovate a rental property can generally be deductible to the extent the borrowed money is used to produce assessable rental income. The use of the borrowed funds — not the property used as security — is what matters.

Redraw and mixed-use loans — TR 2026/1: The ATO's Taxation Ruling TR 2026/1 explains rental income and deductions for individuals who are not carrying on a rental property business. If part of a loan is used privately — for example, a redraw used for a holiday or private car — interest must be apportioned and the private portion is not deductible against rental income.

Repairs vs Capital Improvements — Critical Distinction

This distinction catches a lot of investors off guard:

Type	Definition	Tax treatment	Example
Repair	Restoring something to its original condition	Immediately deductible	Fixing a broken tap, repainting peeling walls, replacing broken fence palings
Maintenance	Preventing deterioration of an existing asset	Immediately deductible	Cleaning gutters, treating timber decking, servicing air conditioning
Capital improvement	Making something better than its original condition, or adding something new	Deductible over time (Div 43 at 2.5%/yr or Div 40)	Installing a new kitchen, adding a bathroom, building a carport
Initial repairs	Fixing pre-existing damage that existed when you bought the property	Capital — not immediately deductible	Fixing known structural issues at purchase, replacing worn carpet present at settlement

Property Management Fees

Property management fees and commissions incurred in earning rental income are generally deductible. Keep your property manager statements and invoices so you can substantiate the amounts claimed.

Insurance

Landlord insurance, building insurance and eligible contents insurance premiums are generally deductible when they relate to earning rental income. Body corporate administrative fund fees and general-purpose sinking or reserve fund contributions may also be deductible. A special levy for capital works can have different treatment and may instead give rise to a capital works deduction as the work is carried out.

Depreciation — Deductible Over Time

Division 43 — Capital Works (Building Structure)

Eligible construction expenditure on rental property capital works may be deductible under Division 43. For many residential buildings where construction started after 15 September 1987, the rate is 2.5% per year for 40 years; other dates and qualifying uses can produce different rates or periods. The ATO's capital works rules should be checked for the specific property.

Division 40 — Plant and Equipment

Removable assets like air conditioners, carpets, blinds, dishwashers, and hot water systems can be depreciated over their effective life using either the prime cost or diminishing value method.

Second-hand asset restriction: For most individual investors, Division 40 deductions are restricted for second-hand depreciating assets in residential rental premises acquired at or after 7:30pm on 9 May 2017. New depreciating assets you acquire for the rental property may still qualify for decline-in-value deductions. Eligible Division 43 capital works are dealt with separately.

Consider a quantity surveyor report when construction costs are unknown. If you cannot determine actual construction costs, the ATO allows an estimate by a quantity surveyor or another appropriately qualified independent person. A quantity surveyor report can also include depreciating assets, and the expense of producing an eligible report can be claimed separately. A quantity surveyor is helpful, but the ATO does not say one is mandatory in every case.

Rental Property Tax Saving Calculator

🏠 Investment Property Tax Position Calculator — 2026–27

Estimate your rental income, deductions, net position, and indicative tax effect under current rules.

Annual rental income

$28,000

Annual loan interest

$32,000

Other deductible expenses (rates, insurance, PM fees, repairs)

$6,000

Annual depreciation (Div 43 + Div 40 from QS report)

$5,000

Estimated marginal rate (incl. standard 2% Medicare levy)

Total deductions

$43,000

Net rental position

-$15,000

⚡ Negatively Geared

$4,800

indicative tax reduction from rental loss at a 32% marginal rate

Cash loss (excl. depreciation)

-$10,000

actual out-of-pocket

Non-cash deduction

$5,000

depreciation (no cash outlay)

After-tax cash position

-$5,200

actual annual cost

Estimate only. Uses 2026–27 Australian resident marginal income-tax rates plus a standard 2% Medicare levy assumption. The Medicare levy can be reduced or not payable depending on your circumstances. The calculator does not model offsets, HELP, Medicare levy surcharge, ownership shares, private use, PAYG variations, or the negative gearing limits commencing 1 July 2027 for affected established residential property. Consult a registered tax agent for advice specific to you.

The 2026 Negative Gearing Reform — What Changed

From 1 July 2027, negative gearing will be restricted for affected established residential properties. Properties held before the announcement at 7:30pm AEST on 12 May 2026 are exempt from the new limits. For affected established housing acquired after the announcement, residential property losses can be used against other residential property income, including relevant capital gains, and excess losses can be carried forward — but they cannot be deducted against non-residential income such as wages.

The broad policy is legislated, but some implementation details — including definitions for eligible new builds and certain housing exemptions — have been developed through subsequent tranches and consultation. Check the latest Treasury and ATO guidance before relying on an exemption.

Property situation	Current rules	From 1 July 2027
Property held before 7:30pm AEST, 12 May 2026	Existing negative gearing rules apply ✅	Grandfathered from the new limits ✅
Eligible new residential build	Existing negative gearing rules apply ✅	Can continue to be negatively geared ✅
Established residential property acquired after 7:30pm AEST, 12 May 2026	Existing rules apply before 1 July 2027 ✅	Affected losses cannot offset non-residential income such as wages
Commercial property (any)	Losses offset salary ✅	Unaffected — negative gearing reform only applies to residential ✅

What this means in practice: If you held a property before the 7:30pm AEST 12 May 2026 announcement, the new negative gearing limits do not apply to that existing investment. If you acquired established residential property after that time, the new restrictions are relevant from 1 July 2027. Eligible new builds can continue to access negative gearing under the reform framework.

Expenses You Cannot Claim

Travel to Inspect Property

Since 1 July 2017, travel expenses to inspect a residential investment property — petrol, flights, accommodation — are no longer deductible for individual investors. This restriction doesn't apply to commercial property.

Borrowing Costs — Usually Spread Over Up to 5 Years

Eligible borrowing expenses such as loan establishment fees and certain mortgage-related costs are generally claimed over the lesser of 5 years or the loan term when the total borrowing expenses are more than $100. Transfer stamp duty on acquiring the property is generally not an immediate rental deduction; for CGT purposes it may form part of the property's cost base.

Holiday Homes — PCG 2026/3

The ATO finalised PCG 2026/3 in May 2026, setting out its compliance approach for holiday homes that are also rented out. If a property is not genuinely available for rent for part of the year — for example because access is restricted or conditions make genuine rental unlikely — deductions may need to be apportioned.

Record Keeping — What the ATO Expects

Keep records that support rental income and deductions for the ATO's required retention period. Many income-tax records need to be kept for 5 years, but records relevant to capital gains, ownership, capital works and depreciating assets can need to be kept for longer. Do not discard purchase, construction or improvement records simply because 5 years have passed since an annual return.

Rental income statements from your property manager or direct tenants
Loan statements showing interest charged each month
Council rates, water, and land tax notices
Insurance renewal documents
Repair and maintenance invoices and receipts
Property management fee statements
Quantity surveyor depreciation report
All purchase documents (contract, settlement statement, stamp duty receipt)
Records of any periods of private use

Common Questions

Can I claim interest on a loan I used to buy shares if I used the property as security? ▼

The deductibility of interest generally follows what the borrowed money was used for, not the asset offered as security. If money borrowed against a property is used to acquire income-producing shares, the interest may be deductible subject to the rules applying to that investment. Likewise, borrowing secured against a home can still produce deductible interest where the borrowed funds are used for an income-producing rental property. Mixed or private use requires apportionment.

I replaced the entire carpet — is that a repair or a capital improvement? ▼

Replacing the entire carpet is generally treated as acquiring a new depreciating asset rather than as an immediately deductible repair. New carpet you purchase for the rental property may generally be claimed through decline in value under Division 40, subject to the residential rental property rules. This is different from repairing a damaged part of an existing item.

My property was vacant for 3 months between tenants — can I still claim all deductions? ▼

Eligible ongoing expenses may still be deductible if the property was genuinely available for rent during the vacancy period at realistic market conditions. If the property was used privately, access was restricted, or the rental conditions meant it was not genuinely available for rent, expenses may need to be apportioned.

Can I claim a PAYG variation for my investment property losses? ▼

If an eligible rental loss is expected to reduce your taxable income, you may be able to apply to the ATO for a PAYG withholding variation. For affected established residential property from 1 July 2027, losses that are prevented from offsetting wages under the new negative gearing limits will not provide that salary-offset benefit. Other circumstances can still affect whether a variation is appropriate.

Do I need a quantity surveyor report or can my accountant prepare depreciation figures? ▼

Not necessarily. If actual construction costs cannot be determined, the ATO says you can use a reasonable estimate prepared by a quantity surveyor or another appropriately qualified independent person. A quantity surveyor can also prepare a schedule of depreciating assets. The expense of producing an eligible quantity surveyor report can be claimed separately. Whether you need a report depends on the records available and the deductions you are claiming.

Sources: ATO — Rental expenses, ATO — TR 2026/1, ATO — PCG 2026/3, ATO — Australian resident tax rates, Treasury — 2026–27 tax system changes

Disclaimer: This article is general information only and does not constitute tax or financial advice. Investment property tax rules — particularly the 2026 negative gearing reforms — are complex and their application depends on your specific circumstances, purchase date, ownership structure and property type. Always consult a registered tax agent before making decisions based on this information. Rates and rules are current as of August 2026.

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