Investment Property Tax in Australia: What Every Investor Needs to Know

Why Tax Strategy Matters for Property Investors

Tax is not just an obligation, it's a lever.

Managed well, your tax position can meaningfully improve your investment returns each year. Managed poorly, it can erode cash flow, create compliance risks with the ATO, and cost you thousands in missed deductions.

The ATO treats rental income as assessable income, which means every dollar you earn from tenants must be declared. The ATO also allows investors to claim a wide range of expenses, and understanding the difference between what you can and can't claim is where strategy begins.

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Negative Gearing: What It Is and How It Works

Negative gearing is one of the most widely discussed, and misunderstood, concepts in Australian property investing.

An investment property is negatively geared when the costs of owning it exceed the rental income it generates.

For example:

• Annual rental income: $28,000
• Annual ownership costs (interest, rates, management fees): $38,000
• Net rental loss: $10,000

That $10,000 loss can be offset against your other income (such as your salary), reducing your overall taxable income. 

Key points about negative gearing:

• It is a legal and widely used property investment strategy in Australia
• The real benefit comes when capital growth outpaces the annual holding cost
• Negative gearing does not mean a property is a poor investment, it means short-term costs exceed short-term income, with the expectation of long-term capital gain

Negative gearing is not a strategy in isolation. It works alongside capital growth. A negatively geared investment property that doesn't grow in value is simply a loss-making asset.

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What Can You Claim? Deductible vs Non-Deductible Expenses

One of the most common mistakes property investors make is either overclaiming or underclaiming deductions. Both carry risk, one triggers ATO audits, the other costs you money.

Deductible Expenses (Claimable in the Year Incurred)

These are ongoing costs directly related to earning rental income:

• Loan interest - the interest portion of your mortgage repayments (not the principal)
• Property management fees - charged by your real estate agent
• Council rates and water charges
• Land tax (where applicable)
• Building and landlord insurance
• Repairs and maintenance - costs to restore the property to its original condition
• Advertising for tenants
• Pest control and cleaning
• Accounting and tax agent fees related to your investment

Non-Deductible Expenses (Not Immediately Claimable)

• Loan principal repayments - these reduce your debt, not your taxable income
• Capital improvements - renovations that add value to the property (these may be depreciable over time, but cannot be claimed immediately as repairs)
• Personal use costs - any portion of expenses related to periods you or family members use the property
• Purchase costs - stamp duty and conveyancing fees form part of the property's cost base for CGT purposes, not an immediate deduction

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The Difference Between Repairs and Improvements

This is a grey area that catches many investors out:

• Repair: Fixing a broken fence panel = immediately deductible
• Improvement: Replacing the entire fence with a new one = capital improvement, depreciated over time

If the ATO determines you've claimed an improvement as a repair, it can be reversed. Keep records and consult your accountant.

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Depreciation: One of the Most Underutilised Tax Deductions

Depreciation is a non-cash deduction meaning you don't spend money to claim it. It simply represents the wear and tear of your property over time, and it can add thousands of dollars to your deductions each year.

There are two types:

• Division 43 (Capital Works): Covers the structure itself including walls, roofing, flooring. You can claim 2.5% of the original construction cost per year, for properties built after 15 September 1987.
• Division 40 (Plant & Equipment): Covers removable assets like ovens, air conditioning, hot water systems, and carpets. Each item depreciates at a rate set by the ATO.

Get a Quantity Surveyor Report

To claim depreciation, you need a Tax Depreciation Schedule from a qualified quantity surveyor. It's a one-off cost of around $600 to $900 (which is itself tax deductible), and it can unlock $5,000 to $15,000+ in additional deductions per year. Without one, you're almost certainly leaving money on the table.

Depreciation is typically highest in the first ten years, making it especially valuable for investors buying new or near-new properties.

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Capital Gains Tax on Investment Property: What You Need to Know

When you sell an investment property in Australia, any profit you make is subject to Capital Gains Tax (CGT). CGT is not a separate tax, it is added to your assessable income in the year of sale and taxed at your marginal rate.

How CGT is calculated:

Capital Gain = Sale Price − Cost Base

Your cost base includes:

• The original purchase price
• Stamp duty and conveyancing fees
• Legal costs
• Capital improvement costs
• Selling costs (agent commissions, legal fees)

The 50% CGT Discount

This is one of the most significant tax concessions available to Australian property investors.

If you have owned the property for more than 12 months and are an Australian resident, you are entitled to a 50% discount on your capital gain.

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Record-Keeping: The Foundation of Tax-Smart Investing

The ATO can audit rental property claims at any time, and poor records are the most common reason investors face penalties or miss legitimate deductions.

Documents you need to keep:

When you buy:

• Contract of purchase and settlement statements
• Stamp duty and legal fee receipts
• Loan documents and mortgage broker fees

During ownership:

• All rental income statements from your property manager
• Receipts for every deductible expense
• Records of any periods the property was vacant or used personally
• Invoices for repairs, maintenance, and improvements (clearly distinguishing between the two)
• Your depreciation schedule

When you sell:

• Contract of sale and settlement statements
• Agent and legal invoices
• All records contributing to the cost base calculation

The ATO requires records to be kept for 5 years after you lodge your tax return, or for CGT purposes, 5 years after the year of sale.

Common Tax Mistakes Property Investors Make

Even experienced property investors make these errors:

• Claiming the full loan repayment instead of just the interest component
• Treating capital improvements as repairs
• Failing to apportion expenses during vacancy or personal use periods
• Not obtaining a depreciation schedule for a property that qualifies
• Missing the 12-month mark before selling and losing the CGT discount
• Poor record-keeping leading to missed deductions or ATO disputes

Stay Compliant, Stay Strategic

Tax is one of the most controllable variables in your investment property returns. Investors who take the time to understand negative gearing, depreciation, deductible expenses, and CGT planning consistently achieve better financial outcomes than those who treat tax as an annual afterthought.

The key principles:

• Claim every legitimate deduction: not more, not less
• Get a depreciation schedule if your property qualifies
• Hold for 12+ months to access the CGT discount
• Keep thorough records from day one
• Work with a qualified tax agent who understands property

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