Which investment property expenses are tax deductible?

Owning an investment property comes with a whole host of expenses to cover, including property manager fees, repairs and maintenance, and your investment loan repayments. 

But it’s tricky to know which investment property expenses you can claim as a deduction on your tax return.

If you own an investment property, the money you make from rental income contributes towards your overall taxable income.

Just like claiming expenses for your salaried income, you can claim deductions on your investment property income to help reduce how much tax you pay. 

One of the more common methods for reducing your income through an investment property is known as negative gearing. 

But if you can’t negatively gear your property, the next best move to reduce your tax bill might be to look at how much you’ve spent on your rental property and see if you can claim deductions. 

According to the Australian Taxation Office  (ATO), you can claim any rental property expense that was made for the ultimate goal of producing rental income. 

Of course, there are different rules for how much you can claim, depending on the nature of your investment property deduction.

There are lots of expenses you can claim as a deduction on your investment property at tax time. However, it’s important to note that not all types of deductions are treated the same way. 

The ATO says there are three categories of rental property expenses: 

• Expenses you can claim in the same financial year, including interest on your investment home loan, council rates, repairs and maintenance, and depreciation on assets worth less than $300. 
• Expenses you can claim over several years, including renovations or extensions, loan establishment fees, Lenders Mortgage Insurance (LMI), and asset depreciation.  
• Expenses that you can’t claim, including personal expenses, the money you borrow for your investment loan, and capital expenses (e.g. stamp duty, and solicitor and conveyancer fees). 

Expenses you can claim in the same financial year

You can claim deductions for some expenses in the same financial year you paid for them, as long as your property is rented out or genuinely available for rent (i.e. being advertised). 

To claim a deduction, you will have to have paid for it out of your own pocket and kept a record of your expense, such as a receipt, in case you need to provide proof to the ATO. 

Expenses you can claim in the same financial year include: 

• Advertising for tenants 
• Bank charges 
• Body corporate admin fees 
• Council rates, water charges, and land tax 
• Cleaning, gardening, and mowing 
• Pest control 
• Landlord insurance
• Interest on your investment loan 
• Prepaid expenses
• Property agent fees and commission 
• Repairs and maintenance 
• Legal expenses
• Lease document expenses
• Mortgage discharge expenses 
• Tenant relocation costs due to property being temporarily unfit to rent
• Secretarial and bookkeeping costs
• Security patrol fees
• Servicing costs for property assets (e.g. water heaters)
• Tax-related expenses.

Expenses you can claim over several years 

The expenses you can claim as a deduction on your rental property over several years can be broadly put into three categories: borrowing expenses, asset depreciation, and capital works expenses. 

Borrowing expenses 

Borrowing expenses are those that are directly related to taking out a loan for your property and include:

• Investment loan establishment fees 
• Title search fees charged by your lender 
• Costs for preparing and lodging your loan documents
• Mortgage broker fees 
• Stamp duty charged on your loan 
• Valuation fees 
• Lenders Mortgage Insurance (LMI).

According to the ATO, if your total borrowing expenses are worth over $100, you need to spread the deduction over 5 years, or the remaining term of your loan, whichever is less. If the total borrowing expenses you made were less than $100, then they are fully deductible in the year you made the expenses. 

Decline in value of depreciating assets 

The ATO has rules for how deductions based on the depreciation of assets  within your rental property work. But, generally speaking, tax deductions are available for items like: 

• Air conditioners
• Stoves
• Carpets
• Curtains
• Furniture 
• Television sets
• Washing machines and dryers. 

However, you must have incurred the cost of purchasing these assets, for the express purpose of generating rental income from your investment property. If these assets are second-hand or came with the property, then you will not be able to claim the depreciation as a deduction. 

Capital works expenses

You can claim tax deductions for capital works on your investment property too. Generally speaking, capital works deductions can include: 

• Building an extension (e.g. a garage, a pergola, or a patio)
• Alterations (e.g. removing a wall) 
• Structural improvements (e.g. adding a sealed driveway, retaining wall, or fence). 

However, it’s important to note that you can only claim capital works as a deduction once construction is complete and that there are different rates and timeframes at which deductions can be made. Head over to the ATO’s website for more information about capital works deductions . 

Investment property expenses you can not claim 

There are a range of expenses you won’t be able to claim as a deduction. These are typically costs that you did not incur, aren’t directly related to generating rental income, or expenses that you incur when selling or buying your investment property. 

For example: 

• The principal amount you borrowed to buy the property 
• Loan balances for the property 
• Mortgage repayments against the principal 
• Stamp duty charged by your state or territory government
• Legal expenses (e.g. solicitor and conveyancer fees) 
• Mortgage protection insurance premiums
• Borrowing expenses on any portion of your loan that was used for personal purposes (e.g. buying a car).

At the end of the financial year, you are required to declare all the income you received from your rental property in that year and you can make claims for any expenses you incurred in that year. This means that you also need to have legitimate receipts proving your expenses. 

There are three main steps to claiming your investment property deductions on your tax return. 

1. Report your rental income for the year 

First, report your gross rental income (the amount before real estate agent or property manager fees or expenses) in your tax return. 

This could include:

• Short-term rental arrangements (e.g. Airbnb) 
• Rent received from renting out part of your property
• Insurance payouts 
• Rental bond money you keep. 

2. Report your expenses for the year 

Next, it’s time to work out and report all of your expenses. You should only claim expenses if you can directly connect to earning income from your investment property. 

You also need to check if the expenses you’re claiming as a deduction are supposed to be claimed over several years (borrowing expenses, asset depreciation, and capital works expenses), or if you can claim them in the same year as you spent them. 

If your property wasn’t used as a rental for a part of the year, only part of your property was rented out, you used the property yourself, it was vacant, or you rented it at below market rates, you may have to apportion your expenses accordingly.

3. Keep records of your income and expenses 

Lastly, make sure you keep accurate records of income and expenses, in case you need to prove your claims. 

If owning an investment property is all about maximising your returns, don’t let an expensive interest rate eat into your investment. Compare investment home loans to see if you can find a competitive rate today.