The Great Australian Dream: Your Investment Property Tax Guide
- Ben De Rosa
- 6 days ago
- 5 min read
Investing in property is a cornerstone of wealth creation in Australia. Many see it as a money-making machine: buy it, let a tenant pay rent to use it, and watch its value grow over time.
What many new investors forget is that this machine needs maintenance, has running costs, and comes with an instruction manual written by the ATO.
At Aevum Accounting, we see clients navigate this world every day. The difference between a great investment and a costly headache often comes down to understanding that manual. This guide is here to simplify it for you.
Our Client's Experience:
"Aevum provides fantastic service... Ben is highly knowledgeable on all things tax related and goes out of his way to ensure he provides a service suited to your needs. Simple or complex, I couldn't recommend Ben and the team highly enough." — Aaron Bergsma
Part 1: Declaring Your Income
Before we get to the fun part (deductions), you must have all your income on the books. The ATO considers all money you receive from the property as assessable income. This includes:
The weekly rent.
Insurance payouts for lost rent or damage.
Money a tenant pays you for a repair they caused.
Any bond money you retain.
Part 2: Your Guide to Tax Deductions
The goal is to claim every legitimate expense to reduce your taxable income. We can separate these into a few key categories.
Immediate Deductions (Annual Running Costs)
These are the most common expenses you can claim in the same financial year you pay for them:
Loan Interest: The interest portion of your mortgage repayments.
Property Management: Fees paid to a real estate agent.
Council & Water Rates: Your regular council and water service charges (not usage paid by the tenant).
Land Tax: A state-based tax that may apply.
Strata Levies: If your property is a unit or townhouse.
Landlord Insurance: A must-have for any investor.
"Slow-Burn" Deductions (Borrowing Expenses)
What about the costs of getting the loan in the first place, like application fees or mortgage broker fees? These are called borrowing expenses. You can't claim them all at once. Instead, these costs are deducted over the term of the loan, or for five years, whichever is shorter.
Part 3: Repairs vs. Improvements vs. Depreciation (A Critical Guide)
This is the area where investors make the most mistakes.
Repairs & Maintenance
A repair is work that restores something to its original condition, like fixing a broken hot water system or replacing a cracked fence panel. These costs are generally 100% deductible in the year you pay for them.
An improvement is work that makes something better than it was, like replacing the entire fence with a new, premium one. Improvements are capital costs and are claimed over time as depreciation (see below).
The 'Initial Repairs' Trap
This is a massive trap for new investors. If you buy a property with a rotten deck, the cost of fixing it is not an immediate deduction. The ATO considers this an "initial repair" and part of the capital cost of buying the property, as it was a defect you bought with the house.
Depreciation: The 'Phantom' Deduction
Depreciation is a non-cash deduction for the wear and tear on your property. It's one of the most powerful deductions because you don't have to spend any new money to claim it. It's split into two parts:
Capital Works (The Building): This is the structure itself—the bricks, roof, and wiring. For properties built after September 1987, you can generally claim this at 2.5% per year for 40 years.
Plant & Equipment (The Assets): These are the removable items like carpets, blinds, ovens, and dishwashers.
CRITICAL RULE CHANGE: For second-hand residential properties acquired after 7:30 pm on 9 May 2017, you cannot claim depreciation on any existing plant and equipment assets. You can, however, still claim Capital Works on the building, and you can depreciate any new assets you buy and install yourself.
The Must-Have Report
To claim depreciation correctly, you must get a Tax Depreciation Schedule from a qualified Quantity Surveyor. They will assess the property and create a report detailing all your eligible deductions for up to 40 years. The fee for this report is a one-off cost and is 100% tax-deductible.
Part 4: Warning! The ATO's Top Tax Traps
We see the same costly mistakes every year. Avoid these red flags.
Myth Busting: Claiming Travel Costs The ATO is very clear: for residential rental properties, you cannot claim any deductions for the cost of travel to inspect, maintain, or collect rent. That flight to the Gold Coast to "check on the holiday rental" is not claimable.
Overclaiming Loan Interest You can only claim interest on the portion of the loan used for the investment. If you have a loan with a redraw facility and pull out $50,000 to buy a car, the interest on that $50,000 is for a private purpose and is not deductible. You must correctly apportion your interest claim.
Poor Record Keeping A bank statement showing "Bunnings $500" is not enough. You must keep the actual invoices and receipts that prove what the expense was for. Without evidence, the ATO can deny your claims.
Part 5: Your Strategy: Gearing, CGT, and Ownership
What is Negative Gearing?
It's a term you hear everywhere.
Negative Gearing: Your total deductible expenses are greater than your rental income, creating a net rental loss. You can often offset this loss against your other income (like your salary), reducing your overall tax.
Positive Gearing: Your rental income is higher than your expenses, creating a taxable profit.
Renting a Spare Room (The Big CGT Catch)
If you rent a spare room on Airbnb or to a boarder to help with the mortgage, you must declare that income. You can also claim a portion of your household expenses (rates, insurance, mortgage interest) based on the floor area of the rented room.
The Catch: Your main home is normally 100% exempt from Capital Gains Tax (CGT). The moment you start using a portion of it to earn income, you lose that exemption for the same portion. If 15% of your home is used to earn income, 15% of the capital gain you make when you sell will be taxable.
Selling Up: Capital Gains Tax (CGT)
CGT is the tax you pay on the profit when you sell. The profit is your selling price minus your "cost base."
Cost Base = Original Purchase Price + (Stamp Duty, Legal Fees) + (Capital Improvements) - (Capital Works Depreciation Claimed)
The best part? If you've held the property for more than 12 months, you are generally entitled to a 50% discount on the capital gain.
What if You Lived in it First?
If you move out of your home and rent it out, the "6-year rule" may allow you to treat it as your main residence for up to six years and still get the full CGT exemption (provided you don't nominate another property as your main residence).
When you first make your home available for rent, you must get a retrospective property valuation. This market value becomes the new cost base for CGT calculations, a critical step that is often missed.
Make Your Investment Work for You
As you can see, there are a lot of moving parts. An investment property is a powerful machine, but it needs to be tax-efficient to work properly.
At Aevum Accounting, we help our clients navigate this entire lifecycle. We can forecast the tax implications before you buy, ensure you're structured correctly, and plan for Capital Gains Tax in the future.
Don't let the "ATO instruction manual" turn your dream into a headache.
Disclaimer: The information and strategies shared in this article are for general informational purposes only and do not constitute specific tax or financial advice. Everyone's situation is unique, and tax laws are complex and constantly evolving. For personalized advice tailored to your specific individual or business needs, we always recommend consulting with a qualified professional at Aevum Accounting.
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