Rental Property Tax Deductions: Capital Works, Depreciation, Repairs & Interest (2025–26)

Updated for the 2025–26 income year, with 2026–27 changes noted. Reviewed 19 October 2026.

Rental property deductions fall into three groups: costs you claim in the year, costs you claim over several years, and costs you can't claim at all. Getting the category right is where most errors happen. This guide covers residential rentals held as an investment (not a business).

1. Claim in the year you pay

• Interest on the loan used to buy, renovate or maintain the rental.
• Council rates, water charges, land tax and strata or body corporate levies (administrative fund).
• Landlord and building insurance.
• Property management fees, letting fees and advertising for tenants.
• Repairs and maintenance for wear and tear or damage that happened while the property was rented.
• Pest control, gardening, cleaning between tenants, and smoke alarm servicing.
• Borrowing expenses of $100 or less in total.

2. Interest: apportion mixed-purpose loans

Interest is deductible to the extent the borrowed money is used for the rental. If you redraw on the loan, or use a line of credit for a car, holiday or your own home, the interest on that portion is private and must be apportioned. Paying the loan down and redrawing for private use changes the purpose of that part of the loan. Keep loan statements that let you trace each drawdown.

3. Capital works (Division 43) vs depreciating assets (Division 40)

Capital works are the building itself and structural improvements: walls, roofs, built-in kitchens, bathrooms, driveways, fences, retaining walls. For residential buildings where construction started after 15 September 1987, the deduction is generally 2.5% of the construction cost each year for 40 years from completion. Construction started between 18 July 1985 and 15 September 1987 is 4%. Nothing can be claimed for buildings started before 18 July 1985, although later structural improvements may qualify. The claim is based on construction cost, not purchase price. A quantity surveyor can estimate it, and their fee is deductible.

Depreciating assets are items that can be removed or wear out quickly: ovens, dishwashers, hot water systems, air conditioners, carpets, blinds and furniture. Each is depreciated over its effective life. Assets costing $300 or less can be claimed immediately, and assets under $1,000 can go into a low-value pool.

The second-hand asset rule: for residential rentals, you can't claim decline in value for previously used depreciating assets acquired at or after 7:30pm on 9 May 2017, including assets that came with a property you bought, or assets in your former home that you then rent out. New assets you buy and install are fine. Exceptions apply to rental property businesses and certain entities. The unclaimed cost may instead reduce a capital gain when you sell.

4. Repairs vs initial repairs vs improvements

• Repairs restore something to its original condition due to wear and tear or damage while rented, for example fixing a broken window or replacing part of a fence. Deductible immediately.
• Initial repairs fix defects that existed when you bought the property. They aren't deductible immediately even if the property was rented right away; they may be claimed as capital works or form part of the cost base.
• Improvements make the property better than it was (for example, replacing a laminate benchtop with stone, or a full kitchen renovation). These are capital: claimed as capital works or depreciation over time.

5. Borrowing expenses

Loan establishment fees, lender's mortgage insurance, broker and valuation fees, title search fees charged by the lender, and stamp duty on the mortgage are claimed over 5 years (or the loan term if shorter), unless they total $100 or less. Stamp duty on the property transfer and conveyancing fees aren't borrowing expenses; they form part of the cost base.

6. What you can't claim

• Travel to inspect, maintain or collect rent for a residential rental (since 1 July 2017), unless you're carrying on a rental business or are an excluded entity.
• Vacant land holding costs (interest, rates, land tax) from 1 July 2019, unless the land is used in a business or a new dwelling is built, lawfully able to be occupied and available for rent.
• Expenses for periods the property was used privately or not genuinely available for rent.
• ATO general and shortfall interest charges incurred from 1 July 2025.
• Holiday home ownership costs where the property isn't mainly used to earn rent. See our holiday rental guide.

7. Apportioning for private use and below-market rent

If you rent to family or friends below market rate, the ATO limits your deductions to the rent you receive, or to the period of genuine rental. If part of your own home is rented, apportion by floor area and time. The ATO's PCG 2026/2 sets out accepted apportionment methods.

Worked example

Example (illustrative figures only – not real client data): Kate bought a 2005-built apartment for $620,000 in July 2025 and rented it out all year. Her quantity surveyor estimates construction cost attributable to her unit at $240,000.

She can't claim depreciation on the second-hand carpets and blinds that came with the apartment, and the $25,000 transfer stamp duty goes into her cost base. If rent received was $31,200, her net rental result is a loss she can offset against her wages for 2025–26.

Checklist

• Get a quantity surveyor's depreciation schedule for any property built after July 1985.
• Separate repairs from improvements and initial repairs.
• Check loan statements for private redraws.
• Confirm rented and available dates, and any private use.
• Use the agent's end-of-year statement and reconcile to your bank.

Common mistakes to avoid

• Claiming the purchase price of second-hand appliances in a property bought after May 2017.
• Claiming initial repairs immediately.
• Claiming interest on redraws used privately.
• Claiming travel to the property.
• Claiming all borrowing costs in year one.

Record-keeping tips

• Keep purchase and sale documents until 5 years after you sell (they set your CGT cost base).
• Keep a register of capital works and depreciating assets with dates and costs.
• Keep loan statements showing each drawdown's purpose.

When to see an accountant

Get personal advice from a registered tax agent if:

• you're renovating, subdividing or building;
• you rent part of your home or rent to family;
• you're buying an established property after 12 May 2026 (new negative gearing rules apply from 1 July 2027);
• you have an ABN, side business or rental property as well as your job;
• you have received an ATO letter, review or amended assessment.

Related guides

• Rental property deductions (summary)
• Negative gearing
• Capital gains tax
• all deduction guides

ATO sources for this guide

• ATO: Rental expenses
• ATO: Rental properties guide 2026
• ATO: Work out your capital works deductions
• ATO: Capital expenses (rental)
• ATO: Depreciating assets in rental properties
• ATO: Second-hand depreciating assets
• ATO: Repairs and maintenance expenses (rental)
• ATO: Borrowing expenses
• ATO: Interest expenses (rental)
• ATO: Rental properties and travel expenses
• ATO: Deductions for vacant land
• ATO: Deductions for ATO interest charges denied
• ATO: Copyright notice

This guide is written in our own words. It draws on information published by the Australian Taxation Office, and some short phrases are quoted with attribution. Source material: © Australian Taxation Office for the Commonwealth of Australia. Top Accountants is not endorsed by, or affiliated with, the ATO.