The Great Australian Dream: Your Investment Property Tax Guide
Updated: Aug 24
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.
Update, July 2026: This guide was first published in November 2025. The 2026-27 Federal Budget has since changed the rules on negative gearing and the capital gains tax discount, with both taking effect from 1 July 2027. The principles below still apply, but if you are buying an established property, read The Great Australian Dream Part 2: The Negative Gearing Shake-Up for what has changed, who is affected, and what is grandfathered.
Updated 24 August 2026. Both changes flagged above are now law: the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received assent on 26 June 2026. Two passages below state the old rules, and both are corrected where they appear. The short version is this.
The salary offset is going. From the 2027-28 income year a net loss on a residential dwelling is quarantined, carried forward indefinitely and offset against residential rental income and then residential capital gains, applied before any discount. Interests last acquired before 7.30pm on 12 May 2026 are grandfathered indefinitely, and the contract date governs rather than settlement.
The 12-month, 50% discount is going too. From 1 July 2027 the discount for individuals drops to zero on ordinary assets, replaced by cost base indexation and a minimum 30% rate. It is not retrospective: assets held on 30 June 2027 are treated as sold that day at market value and reacquired the next, so gains accrued to then keep the 50% discount and are deferred until you actually sell. The market value of your property at 30 June 2027 is worth recording.
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.
Getting the depreciation split right is where a good tax accountant earns their fee.
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. From the 2027-28 income year this is no longer available for an established residential property acquired after 7.30pm on 12 May 2026: the loss is quarantined instead, and offset only against residential rental income and then residential capital gains.
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.
Correction, 24 August 2026: that is the position for CGT events happening before 1 July 2027. From that date the 50% discount for individuals is zero on ordinary assets, replaced by cost base indexation and a minimum 30% rate on the gain. Gains accrued up to 30 June 2027 are preserved through a deemed sale and reacquisition at market value on that date, and deferred until you actually sell.
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.
Prefer to listen? We covered this in The Great Australian Dream: Investment Property 101, episode 15 of the Aevum Accounting Podcast.
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 personalised advice tailored to your specific individual or business needs, we always recommend consulting with a qualified professional at Aevum Accounting.
Comments