Tax advice for property investment

Investment property tax deductions generally fall into three categories: expenses you can claim immediately, costs claimed over several years and amounts that may form part of the property’s cost base for capital gains tax purposes. The treatment depends on what the expense relates to, when it was incurred and whether the property was rented or genuinely available for rent.

Understanding these differences can help you claim eligible costs correctly while maintaining accurate records for a future sale. Personal expenses and costs relating to private use are not deductible, and shared expenses may need to be apportioned.

Loan interest and borrowing expenses

You may generally claim interest charged on a loan used to buy, repair, renovate or purchase depreciating assets for a rental property, provided the property is rented or genuinely available for rent. The deduction depends on how the borrowed funds are used, not on which property secures the loan.

This distinction matters when a loan is refinanced, redrawn, or used in part for personal expenses. Any private portion must be separated, and the related interest cannot be claimed as a rental deduction.

Borrowing expenses can include:

• loan establishment fees
• lender-required valuation fees
• mortgage broker fees
• title search and mortgage document costs
• lender’s mortgage insurance

These expenses may need to be claimed over several income years rather than deducted in full when paid.

Property management, repairs and ongoing costs

Many costs incurred while earning rental income may be immediately deductible. Depending on the circumstances, these can include:

• property management fees and commissions
• council rates, water charges and land tax
• landlord insurance
• advertising for tenants
• body corporate administration fees
• pest control, gardening and cleaning
• eligible repairs and maintenance

Repairs generally restore something that has become worn, damaged or broken while the property is being rented. Replacing damaged carpet or repairing part of a fence may qualify, whereas replacing an entire structure, substantially improving the property or fixing defects that existed when it was purchased is usually treated as capital expenditure.

You also cannot claim selling commissions or a buyer’s agent fee as an immediate rental deduction. These costs may instead be relevant when calculating the property’s CGT cost base.

Depreciation and capital improvements

Some investment property costs are claimed progressively rather than in the year they are paid. These generally include:

• Decline in value of depreciating assets: Eligible assets, such as appliances, blinds, or certain fixtures, may lose value over their effective life. Restrictions can apply to deductions for previously used assets in residential rental properties.
• Capital works deductions: Construction costs and qualifying structural improvements may be deductible over a prescribed period. This can include parts of the building, extensions, renovations and structural improvements.
• Capital improvements: An expense that adds new functionality, replaces an entire asset or improves the property beyond its original condition is generally not an immediate repair deduction. It may instead qualify for capital works or depreciation treatment, or be considered when calculating the CGT cost base.

A depreciation schedule prepared by a qualified quantity surveyor may help identify eligible construction and asset costs, particularly when complete historical records are unavailable.

Record-keeping requirements

Keep clear records of all rental income and property expenses, including:

• purchase and loan documents
• invoices and receipts
• bank and credit card statements
• property manager statements
• tenant leases and rent records
• council, water and land tax notices
• insurance documents
• repair, renovation and depreciation records
• documents connected with the eventual sale

Expense records should identify the supplier, amount, nature of the goods or services, date incurred and document date. Rental income and expense records generally need to be retained for five years from the relevant lodgement date. Records related to the property’s purchase, ownership, and capital improvements may need to be retained longer because they can affect a future CGT calculation.

Negative gearing occurs when the deductible costs of owning an investment property are greater than the rental income it earns. How that loss can be used will depend on when the property was acquired and whether it is a new build. Properties acquired before 7:30 pm AEST on 12 May 2026, as well as eligible new builds, retain full negative gearing. For established residential properties acquired after that time, losses are quarantined and can only be offset against residential rental income or capital gains from residential property, with excess losses carried forward. 

The tax deduction can reduce the cost of holding the property, but it does not remove the underlying cash loss. A sound property investment strategy should therefore consider cash flow, interest rates, expected capital growth and the investor’s broader financial goals, rather than relying on tax savings alone.

How negative gearing affects your taxable income

How a rental loss affects your taxable income now depends on the property’s acquisition date and type.

For properties acquired before 12 May 2026, as well as eligible new builds, a net rental loss can continue to be offset against other assessable income, such as salary, wages or business income.

For established residential properties acquired after that time, the treatment changes from 1 July 2027. Losses are quarantined and cannot be used to reduce salary or other unrelated income. Instead, they can be applied against residential rental income or capital gains from residential property, with any unused amount carried forward to future years.

This means two investors with similar rental losses may have different tax outcomes depending on when the property was purchased and whether it qualifies as a new build.

Example

An investor earns $30,000 in rental income and incurs $40,000 in deductible property expenses, creating a $10,000 rental loss.

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For the last category, any unused loss can be carried forward rather than deducted against salary, wages or unrelated investment income.

Negative gearing does not remove the underlying cash loss. The investor still funds the shortfall, while the tax treatment determines whether the loss can reduce other income or must be quarantined for future use.

PAYG withholding variations and prepaid interest

Investors expecting a rental loss may be able to apply for a PAYG withholding variation. If approved, their employer withholds less tax from salary payments during the year, improving regular cash flow rather than delivering the full expected benefit through a later tax refund.

Some investors also prepay loan interest to bring forward an eligible deduction. The tax treatment is subject to specific timing and prepayment rules, so advice should be obtained before committing funds.

Selling an investment property may result in a capital gain or a capital loss. The calculation generally compares your sale proceeds with the property’s cost base, after accounting for eligible ownership, improvement and disposal costs.

Your final tax outcome may change depending on the ownership structure, contract date, available capital losses, length of ownership and whether the property was once your principal place of residence.

How capital gains tax is calculated

A capital gain on an investment property is generally calculated by subtracting the property’s cost base from the capital proceeds received on sale.

Capital proceeds − cost base = capital gain or loss

The process generally involves:

1. calculating the sale proceeds
2. working out the property’s cost base
3. subtracting any current or carried-forward capital losses
4. applying an eligible CGT discount or exemption
5. including the remaining net capital gain in assessable income

Example calculation

An investor sells a rental property for $850,000. The property’s eligible cost base, including the purchase price and certain acquisition, improvement and selling costs, is $600,000.

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Where the investor is an Australian resident individual and has owned the property for at least 12 months, an eligible 50% CGT discount may reduce the remaining gain to $115,000. That amount is then included in the investor’s assessable income, rather than being taxed at a separate fixed CGT rate.

This is a simplified example. Depreciating assets, capital works deductions, partial private use, ownership percentages and periods of foreign residency may change the final calculation.

The 50% CGT discount and indexation method

From 1 July 2027, the way many investors calculate CGT will change.

Instead of applying the existing 50% CGT discount to eligible gains, the tax system will generally index the asset’s cost base for inflation so that tax is calculated on the real gain. A minimum tax rate of 30% will then apply to qualifying net capital gains.

Importantly, the reform applies to CGT assets generally, not just investment property, and applies to individuals, trusts and partnerships. Gains built up before 1 July 2027 retain the existing treatment, while later gains fall under the new rules.

The main residence exemption and six-month rule

A property may receive a full or partial main residence exemption where it was genuinely used as your home. The exemption does not automatically apply simply because you intended to live there.

When moving between homes, you may be able to treat the old and new properties as your main residence for up to 6 months, subject to specific ownership and income-use conditions.

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Increasing your property’s cost base

Keeping complete records can increase the accuracy of your cost-base calculation and help avoid paying tax on more of the gain than required. Purchase documents, stamp duty statements, renovation invoices and real estate selling costs may remain relevant for many years after the expense was incurred.

Timing the sale of an investment property

For CGT purposes, the relevant date is generally the date the sale contract is entered into, not the date of settlement. A contract signed in June and settled one month later in July will usually fall within the earlier financial year.

Timing may affect:

• the financial year in which the gain is declared
• the ability to apply current or carried-forward capital losses
• eligibility for the 12-month CGT discount
• the investor’s marginal tax rate
• Medicare levy and other income-tested obligations
• superannuation contribution planning
• cash available to meet the tax payable

For jointly owned property, each owner generally reports their share of the gain according to their legal ownership interest. Selling in a year with lower assessable income may reduce the marginal rate applied to the net gain, but commercial factors and property market conditions should also be considered.

Investors should not delay or accelerate a sale solely for a tax advantage without reviewing finance costs, expected sale value and the wider investment strategy.

Under the 6-year rule, a former principal place of residence may continue to qualify for the main residence exemption for up to six years after you move out and rent it.

The rule can reduce or eliminate CGT on a later sale, but only where the property first qualified as your main residence, and you do not claim another home for the same period, apart from the limited six-month overlap allowed when moving house.

How the six-year rule works

To use the six-year rule, the property must generally have been your main residence before you moved out. You cannot apply the rule retrospectively to a property that was rented from the time you acquired it and only became your home later.

Once you stop living in the property:

• it may continue to be treated as your main residence for up to six years while rented or available for rent
• it may continue to qualify indefinitely while it is not used to produce income
• you generally cannot nominate another property as your main residence for the same period
• you make the choice when preparing the tax return for the year in which the CGT event occurs

The six-year limit relates to the time the former home is used to produce assessable income, not necessarily the entire period you are absent. For example, a property could be rented for four years, left vacant for two years and rented for another two years without exceeding six income-producing years.

Example

An owner lives in a property as their main residence before moving interstate. They rent the home for five years, leave it vacant for one year and then sell it.

Provided they meet the other requirements and do not nominate a second home for the same period, they may be able to treat the former home as their main residence throughout the six-year absence. The five rented years count towards the limit, while the vacant year does not.

When the six-year rule does and doesn’t apply

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What happens after six years?

Once the six-year rental limit is exceeded, the period beyond the limit may become subject to CGT. This generally creates a partial exemption rather than making the property taxable for the entire ownership period.

Can the rule apply to two properties?

Owning two homes does not generally provide two full main residence exemptions. You may need to allocate the exemption between them, apart from a limited overlap when changing homes.

How the rule applies to foreign residents

The six-year rule may not protect a former Australian home if you are a foreign resident when it is sold. The main residence exemption is generally unavailable to foreign residents unless a narrow life-events exception applies.

Buying or selling property can create tax implications beyond the purchase price or expected capital gain. Ownership structure, borrowing arrangements, duty, deductions, residency and contract timing may all affect the final outcome.

Reviewing these factors early gives you more scope to plan. Once a contract has been signed or ownership has been established, changing the arrangement may trigger extra tax, duty and compliance costs.

Choosing the right ownership structure

An investment property may be owned individually, jointly, through a trust, company or, in limited circumstances, a self-managed superannuation fund. Each structure has different implications for tax rates, asset protection, borrowing, estate planning, income distribution and access to CGT concessions.

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Reviewing deductions, records and potential CGT

Before purchasing, model the investment’s after-tax cash flow using realistic assumptions for rent, interest, vacancy, and maintenance. A tax deduction can reduce an expense’s after-tax cost, but it does not make the expense free.

Before selling, review the cost base and exemption history early. Missing records or an incorrect assumption about the main residence rules can materially change the CGT estimate.