Rental property tax deductions for 2025⁠–⁠26: what you can claim

If you own a residential rental property, whether it's a long-term let, a granny flat or a holiday house you rent out over summer, this guide explains the main rental property tax deductions for your 2025⁠–⁠26 return. You'll see what you can claim now, what you claim over time, the rules that most often catch owners out, and the changes ahead for holiday homes and negative gearing.

Three kinds of rental property tax deductions

Rental expenses fall into three groups, and the timing of your claim depends on which group an expense belongs to.

The costs of buying the property, such as stamp duty and conveyancing fees, aren't deductible. They generally form part of the property's cost base for capital gains tax (CGT) instead. Special strata levies that fund capital improvements aren't immediately deductible either.

Interest and borrowing costs

Interest on a loan used to buy, repair or maintain a rental property is usually the largest deduction. It's the use of the borrowed money that matters, not which property secures the loan.

• If you redraw from an investment loan for private purposes, such as a car or a holiday, you'll need to apportion the interest between the rental and private portions for the rest of the loan's life.
• Borrowing expenses, such as loan establishment fees and lenders mortgage insurance, are generally claimed over five years, or the loan term if that's shorter. If they total $100 or less, they're generally deductible in full in the year you incur them.

Repairs, improvements and initial repairs

This is one of the most common areas for mistakes.

• Repairs and maintenance fix or prevent damage or wear that arose while the property was rented, such as patching a wall, fixing a broken window or servicing a hot water system. These are generally deductible straight away.
• Improvements go beyond restoring what was there, or replace an entire structure or unit, such as a new kitchen or a complete fence. These are capital, claimed over time as capital works or depreciation.
• Initial repairs fix damage or defects that existed when you bought the property, even if you didn't know about them. They're capital, not deductible repairs, although some may qualify for capital works deductions and they can form part of your cost base.

Example: you buy a Dee Why apartment with a cracked window and fix it before the first tenant moves in. That's an initial repair, so it's capital. Two years later a storm cracks the same window and you replace the glass. That's a repair you can generally claim in full.

Depreciating assets and the second-hand rule

Depreciating assets, such as appliances, carpets and blinds, are claimed over their effective lives. A depreciation schedule from a quantity surveyor can help identify them. An item costing $300 or less may be claimed outright, as long as it isn't part of a set, or one of several identical items, costing more than $300 in total.

For residential rental properties there's a major limit. For second-hand assets acquired at or after 7:30pm AEST on 9 May 2017, including those that came with a property you bought, you generally can't claim depreciation unless you're carrying on a business of letting properties or are an excluded entity. The same applies to assets from your former home when you turn it into a rental.

You can still claim:

• brand-new assets you buy and install yourself
• assets in a newly built or substantially renovated property, where no one was previously entitled to a deduction for them and timing conditions are met
• capital works deductions for the building, which this rule doesn't affect.

Amounts you can't claim may be taken into account when you sell.

Travel to your rental property

Since 1 July 2017, you generally can't claim travel expenses relating to a residential rental property, including car costs, flights, accommodation and meals to inspect it, maintain it or collect rent. The exceptions are narrow: you're carrying on a business of letting properties, or you're an excluded entity, such as a company. Travel for a commercial rental property is treated differently.

Holiday homes and short-term rentals

On the Northern Beaches, plenty of owners rent out a holiday house in Palm Beach or Avalon over summer and use it themselves at other times. That mix is exactly where the ATO has tightened its position.

Is it genuinely available for rent?

You can only claim deductions for periods the property is rented or genuinely available for rent on commercial terms. Warning signs that it isn't include:

• rent set above comparable properties in the area
• advertising that limits its exposure to potential guests
• unreasonable conditions, such as requiring references for short stays or no children
• ignoring or refusing booking requests without good reason.

Apportioning private use

Days used by you, or by family and friends free or at a discount, are private. Expenses must be apportioned so you don't claim for those periods. The ATO's PCG 2026/2 sets out apportionment methods it will accept.

The leisure facility rules from 2026⁠–⁠27

In TR 2026/1, the ATO set out its view that a holiday home you also rent out is a leisure facility. Unless it's used or held mainly to produce rental income, ownership and use costs, including interest, rates, strata fees, capital works and depreciation, aren't deductible at all, even for the weeks it's rented. Only costs such as advertising, booking fees and commissions, and cleaning after guest stays remain claimable. You still declare all the rent you receive.

Whether a property is mainly income-producing isn't just a count of days. The ATO considers your private use and whether the property is available to rent when demand is highest, such as school holidays, public holidays and peak season.

Under its transitional approach, the ATO won't devote compliance resources to applying these rules to expenses incurred before 1 July 2026. For most owners, the practical impact starts in 2026⁠–⁠27, so now is a good time to review how your holiday home is used.

Example: one Palm Beach house is advertised at market rates all year, booked for most of summer, and used by its owners for one week in the off-season. It's likely to be mainly income-producing, with expenses apportioned for the private week. Another is kept free for the family every school holiday and advertised only in winter. From 2026⁠–⁠27, its ownership costs are likely to be denied.

Negative gearing basics, and what's changing

A property is negatively geared when its deductions exceed its rental income. You can generally offset the net rental loss against other income, such as salary, and carry forward any loss your other income can't absorb. It's still a cash loss; the tax saving only offsets part of it.

The 2026⁠–⁠27 Budget announced reforms, and the first stage of legislation became law in June 2026:

• From 1 July 2027, negative gearing for residential property is limited to new builds.
• Properties held, or contracted to be bought, before 7:30pm AEST on 12 May 2026 are grandfathered.
• For established homes bought after that time, rental losses from 1 July 2027 can only be offset against residential rental income or residential capital gains, with any excess carried forward. They can't be deducted against wages or other income.

Some details, such as exactly what counts as a new residential dwelling, are still being settled through further legislation. None of this changes your 2025⁠–⁠26 return, but it matters for any purchase you're weighing up, so get tax planning advice before you sign a contract.

Selling: a brief note on CGT

When you sell, the CGT event generally happens on the date of the contract, not settlement. Under current rules, individuals who have owned the property for at least 12 months can reduce the capital gain by 50%. Your cost base includes purchase costs such as stamp duty and legal fees, but the capital works deductions you've claimed reduce it.

The June 2026 legislation that limits negative gearing also changes CGT: from 1 July 2027 the 50% discount is replaced with cost base indexation and a minimum 30% tax on gains, applying only to gains arising after that date. Investors in new builds will be able to choose the 50% discount instead. If a sale is on the horizon, get advice on timing first.

Records to keep

• rental statements, loan statements, invoices and receipts
• your depreciation schedule and records of capital works and improvement costs
• purchase and sale contracts and settlement statements
• for holiday homes, your advertising, booking reports and a calendar of private use and availability.

Keep records supporting your deductions for five years from the date you lodge, and ownership and cost records until five years after you sell. The ATO also receives data from property managers, landlord insurers, lenders and short-term rental platforms, so your figures should match theirs. Our tax return checklist covers the rest of what to gather.

How Jan can help

Jan can review your rental schedule, depreciation and any holiday home arrangements, and prepare your 2025⁠–⁠26 return with each claim in the right year. See how he works with rental property investors, or book a free intro call.