What you can claim:

You can claim expenses relating to your rental property but only for the period your property was rented or available for rent; for example, advertised for rent.

Expenses could include:

• advertising for tenants
• bank charges
• body corporate fees and charges
• borrowing expenses (over a 5-year period if it is over $100)
• cleaning
• council rates
• decline in value of depreciating assets (refer to the new rules for Div 40 below)
• gardening and lawn mowing
• insurance
• interest expenses
• land tax
• pest control
• property agent fees and commissions
• repairs and maintenance
• stationery and postage
• water charges.

If part of your property is used to earn rent, you can claim expenses relating to only that part of the property. You will need to work out a reasonable basis to apportion the claim. As a general guide, apportionment should be made on a “floor-area basis”, that is, by reference to the floor area of that part of the residence solely occupied by the tenant, together with a reasonable figure for tenant access to the general living areas, including garage and outdoor areas if applicable.

Depreciation Rule Changes from 7:30pm, 9 May 2017.

Second-hand depreciating assets (Div 40) you can’t claim

• Second-Hand Property Assets: If you purchase an established residential property, you can no longer claim an annual deduction for the wear and tear on pre-existing plant and equipment (Div 40. e.g., ovens, carpets, blinds, and air conditioners).
• New Assets Installed by You (Div 40): The rules do not apply to brand-new plant and equipment. If you buy and install a new asset into a second-hand property, you can still claim depreciation on it over its effective life.
• Capital Works (Division 43) Unchanged: Division 43 refers to “Capital Works Deductions”. It allows property investors to claim tax deductions on the structural elements and permanently fixed assets of an income-producing building (e.g., walls, roof, doors, and plumbing).

The legislation only affects Division 40 (Plant and Equipment). Structural elements (e.g., bricks, mortar, and roof tiles) are still fully claimable at the standard 2.5% rate.

Second-hand depreciating assets for residential rental properties (Div 40) are generally things that were in a property when you purchased it, or it was your private residence that you later rent out.

ATO Example: Tim’s rental property

Sue purchased her house in 2009. In October 2025, she listed her house for sale. While it was advertised, she moved out and replaced the carpet. No one lived in the house while it was advertised. The house was then sold to Tim. After purchasing the property, Tim rented it out immediately.

Tim can’t claim a deduction for the decline in value of the depreciating assets in the property because they were all previously used. He also can’t claim a deduction for the decline in value for the carpet because he didn’t own the asset when it was first installed ready for use.

ATO Example: asset used privately

Eliza purchased a dishwasher in April 2017 and used it for private purposes at home (her main residence). In July 2019, she installed this dishwasher in her residential rental property. Eliza can’t claim deductions for the dishwasher’s decline in value because:

• she had previously used it privately, and
• she installed it in her rental property after 30 June 2017.

Home turned into a residential rental property after 1 July 2017:

If you turn your home into a residential rental property on or after 1 July 2017, you can’t claim a deduction for the decline in value for depreciating assets that were in your home. You can only claim a deduction for the decline in value for any new depreciating assets that you purchase for your residential rental property.

ATO Example: changing main residence as a residential property

At the start of 2016, Kendrick purchased a home as his main residence. In August 2017, Kendrick moved out and rented out the property fully furnished, which included the furniture and fittings he had been using while living there.

As Kendrick’s home was made available for rent on or after 1 July 2017, he can’t claim a deduction for the decline in value for any remaining effective life of the used depreciating assets in it.
Kendrick can claim a deduction for the decline in value of the new depreciating assets that he purchases for his rental property.

Home turned into a rental property before 1 July 2017:

If you turned your home into a residential rental property, you can only claim a deduction for the decline in value of assets in it if both of the following apply:

• You purchased your home before 7:30 pm on 9 May 2017.
• You turned your home into a residential rental property before 1 July 2017.

ATO Example: assets bought after 9 May 2017

At the start of 2016, Marty purchased a home as his main residence.

In June 2017, Marty moved out and rented out the property fully furnished, which included the furniture and fittings he had been using while living there.

As Marty rented out his home before 1 July 2017, and he purchased it before 7:30 pm on 9 May 2017, he can claim a deduction for the decline in value for any remaining effective life of the used depreciating assets in it.

However, from the 2017–18 income year, Marty can’t claim a deduction for the decline in value of any second-hand depreciating asset that he purchases and installs after 7:30 pm on 9 May 2017.

If Marty:

• Moved out in June 2017 and the property was vacant until he made it available for rent in July 2017, he couldn’t claim a deduction for the decline in value for any remaining effective life of the used depreciating assets in it.
• Purchased a new asset for the rental property after he moved out, he can claim a deduction for its decline in value, as the asset wasn’t previously used.

Exceptions – when you can still claim Div 40

• Newly constructed properties that were never lived before
• Commercial properties
• You purchased your residential rental property or a second-hand depreciating asset for your residential rental property before 7:30 pm (AEST) on 9 May 2017.
• You used a depreciating asset that you acquired before 7:30 pm (AEST) on 9 May 2017 and then, before 1 July 2017, you installed it at your residential rental property.
• Your rental property is not used to provide residential accommodation; for example, it is let out for commercial purposes (such as a doctor’s surgery).

ATO Example: claiming the decline in value of second-hand assets

Sharon has been renting out her residential property since September 2015. In March 2017, she purchased a second-hand fridge to replace the fridge that had broken down.

Because Sharon purchased the second-hand fridge for her rental property before 7:30 pm on 9 May 2017, she can claim a deduction for the decline in value for any remaining effective life of the asset.

ATO Example: second-hand depreciating asset

Don purchased a second-hand clothes dryer and installed it in his residential rental property on 8 May 2017.

Assuming the dryer had 5 years of remaining effective life, Don can claim deductions for its decline in value for 5 years because he had purchased and installed the dryer before 9 May 2017.

Avoiding Common Mistakes

1. Construction costs – Certain types of construction costs, including extensions, alterations and structural improvements, can be claimed as capital works deductions. However, the purchase cost of the land on which a rental property is constructed cannot be claimed. Instead, the land forms part of the cost base for capital gains tax purposes.

Deductions can be claimed for the decline in value of some types of depreciating assets in residential rental properties – for example, curtains, blinds, dishwashers, refrigerators, stoves, television sets and hot water systems. However, construction costs are not depreciating assets.

2. Interest – If you use a loan facility for both investing and private purposes – for example, to purchase or renovate a rental property and to buy a motor boat – you cannot claim the interest expense on the private portion of the loan (the motor boat). A common mistake is to claim a deduction for interest on the private portion of the loan.
3. Conveyancing expenses – Conveyancing expenses incurred on the purchase and sale of your property are not deductible. Instead, these form part of the cost base for capital gains tax purposes. Stamp duties, property valuation costs, building and pest inspection costs are also capital in nature and are not deductible. They are added onto the cost base of the property.
4. Travel expenses – No longer allowable from 2017/18 financial year.
5. Apportionment of rental expenses: In some situations, rental expenses may need to be apportioned. For example, if your holiday home is used by you, your friends or your relatives free of charge for part of the year, you are not entitled to a deduction for costs incurred during those periods. It is also important that you have a clear intention to rent the property. If you made no attempt to advertise the property, or you set the rent so high it is unlikely a tenant could be found, we would find that you had no intention of renting your property and your rental claims would not be allowed. Some common mistakes are: claiming deductions for any expenses relating to your private use of the property or claiming deductions for a property that is not genuinely available for rent.
6. Deductible borrowing expenses: The correct way to claim borrowing expenses of more than $100 is to spread the deduction over five years, or over the term of the loan, whichever is less. If your borrowing expenses are $100 or less, you can claim the full amount in the income year they are incurred. If you claim your borrowing expenses as a deduction, you cannot include them in your cost base for capital gains tax purposes when you dispose of the property.
   A common mistake is to claim all deductible borrowing expenses in the first year they are incurred.
7. Ownership interests: A common mistake occurs when a property is purchased by a husband and wife as co-owners and the income and expenses are not split in line with their legal interest in the property. If you purchase a rental property as a co-owner and are not carrying on a rental property business, you must divide the income and expenses for the rental property in line with your legal interest in the property. This is despite any written or oral agreement between co-owners stating otherwise.

Negative gearing changes (from The Federal Budget, 12 May 2026)

• Negative gearing (where rental losses are deducted from taxable income) will be limited to new builds only.
• Existing properties owned before Budget night (12 May 2026) are not affected.
• Held property before the Budget night as a main residence and subsequently changing the property to rental, negative gearing will still be applicable.
• Properties purchased under SMSF are not affected.

Capital Gains Tax

As capital gains tax may apply if you sell your rental property, we recommend you keep records of every transaction over the period of ownership of the property. This would include contracts of purchase and sale, and conveyance and loan documentation.

Keeping these records will help you work out your capital gain or loss correctly and ensure you do not pay more tax than you need to.

New Capital Gain Tax Changes from 12 May 2026, the Federal Budget 2026

• The Capital Gains Tax (CGT) discount will move a flat 50% discount to an inflation-based model with a minimum effective tax of 30% on gains (waived in years you receive means-tested support, e.g. Age Pension, JobSeeker).
• Assets include real estate, shares, managed funds, cryptocurrencies and most businesses.

Pre-1 July 2027 Gains: For assets held before 1 July 2027 and sold before 30 June 2027, any capital gains accrued on the existing assets sold before 1 July 2027 will remain eligible for the traditional 50% CGT discount.

Post-1 July 2027 Gains: For any assets acquired before 1/7/2027, when you eventually sell the asset after 1 July 2027, the gain must be split into two periods. For the growth before 1 July 2027, the 50% CGT concession rule applies provided the asset is held for more than 12 months. The growth following 1 July 2027 will be subject to the new law, which replaces the 50% discount with cost-base indexation and enforces a minimum 30% tax rate on the gain.

• A legitimate valuation report is required as at 1/7/2027.
• Share prices and crypto prices published on 1/7/2027 need to be obtained.
• New build election: Investors who buy a qualifying new residential build can elect either the old 50% discount or the new indexation + 30% minimum tax – whichever produces a better outcome. A subsequent buyer of the same property will lose this election.
• Knock down and rebuilding is not treated as a new built home as there is still one home on the same block of land. Exceptions apply to multiple dwellings (e.g. duplex or units).
• A granny flat is not treated as a newly built home.
• Properties purchased or built as new residential builds after Budget night retain the choice to use either the legacy 50% CGT discount or the new indexation rules.
• Death and Divorce Transfer Rules: Transitional rules ensure that grandfathered CGT concessions on jointly owned assets are protected and can be maintained in the event of a partner’s death or a family law court order.
• The 6-Year CGT exemption Rule: Main residence GST exemption rule is not affected (the property has to be your principal residence as soon as it was purchased).

Record Keeping

You need to keep proper records in order to make a claim, even if you use a tax agent to prepare your tax return or you do it yourself. You must keep records of:

• the rental income you receive and the deductible expenses you pay – keep these records for five (5) years from 31 October or, if you lodge later, for five years from the date your tax return is lodged.
• your ownership of the property and all the costs of purchasing/acquiring it and selling/disposing of it – keep these records for five years from the date you sell/dispose of your rental property.

DISCLAIMER

Kasker Associates website is to provide information of general interest to their clients. The content of this website does not constitute specific advice. Readers are encouraged to consult their tax adviser for advice on specific matters.