Australia: how the ATO taxes a rental property from rent to sale

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Kooky

Builder of Shaka, the payment router that pays every agent their commission on closing date.

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A rented house or unit in Australia produces two tax stories at once. The first is told every year, in the owner's tax return: rent on one side, expenses on the other, and a net rental income or a net rental loss at the bottom. The second is told only once, on the day the property is sold, when some of the deductions claimed along the way come back into the capital gains tax calculation.

The Australian Taxation Office (ATO) sets out both stories in its pages on residential rental properties and in its Rental properties guide 2026. This guide follows them in order: the income to declare, the three kinds of expense, the special rules for interest, travel, second-hand assets and construction costs, what the ATO means by negative gearing, the records to keep and the effect at sale. It describes the rules for an individual investor, not for a business of letting property, and each owner's position depends on their facts.

Australian Taxation Office pages on capital expenses, depreciating assets and the Rental properties guide 2026.

What counts as rental income

The ATO's page on rental income starts from a wide rule: an owner declares all the income received from renting, leasing or licensing the property, and that includes a property overseas. A short-term let, a booking through a sharing platform, a room in the owner's own home and an arrangement with family or friends are all inside the rule.

Rent does not have to be money. The ATO says rental income can arrive as goods or services, in which case the owner works out their monetary value and declares that.

The same page lists the payments that sit beside rent and are treated with it:

• bond money the owner keeps in place of rent or because of damage;
• letting and booking fees kept when a renter or a holidaymaker cancels;
• insurance payouts for damage from a natural disaster or an unexpected event, and for loss of rent;
• money from a relief fund after a disaster;
• payments that cover an expense the owner deducts, such as a tenant paying for the repair of damage, or a government rebate for buying a depreciating asset such as a solar hot water system;
• a lump sum of rent, and assessable amounts from a limited recourse debt arrangement over the property.

One kind of payment stays outside. The ATO treats money that householders or family members pay towards family care or shared household costs as a domestic arrangement: it is not declared, and no deduction is claimed against it.

When rent is declared and who declares it

Timing follows the tenant, not the bank transfer. The ATO says rent is declared in the income year in which the tenant pays it, and where the tenant pays an agent or a property manager, in the year the tenant pays them rather than the year the money is passed on. Its own example makes the point with a bond: a bond the owners kept was released on 30 June 2026 and reached the owners' account on 4 July 2026, and it belongs in the 2026 return because the manager received it in that year. The same example has the owners report gross rent, before the manager's fees.

Co-owners divide income and expenses by legal ownership. A person who owns 50% of the property declares 50% of the rent, the ATO says, and its expenses page adds that expenses are attributed the same way.

Three kinds of expense

The ATO sorts every rental expense into one of three categories, defined by whether it can be claimed and when.

Three further exclusions sit on the same ATO page. An expense the owner did not actually pay is not claimed. The costs of acquiring and disposing of the property are not rental expenses; they belong to the capital gains calculation described at the end of this guide. And an owner of residential rental property does not claim goods and services tax credits on rental purchases: the Rental properties guide 2026 says the GST is instead included in the expense claimed.

One further rule concerns payments to contractors. Where the law requires an owner to withhold 47% from a payment to a contractor who has not quoted an Australian business number, and the owner does not do so, the ATO warns that the expense may not be deductible at all.

Costs can be claimed before the first tenant arrives, within limits. The ATO accepts interest, council, water and sewerage rates, land taxes and emergency service levies incurred before the property is used, provided the owner holds it to produce assessable rental income and keeps evidence of that intention, such as communications with real estate agents or rental managers. An owner who decides not to rent and uses the property privately is no longer holding it for that purpose.

When the property is not rented all year

A deduction is available only for the part of an expense that relates to earning rent. The ATO names the situations in which an owner has to apportion: the property was rented or was vacant for part of the year, it was used privately, it is a holiday home, only part of it is rented, it is let below the market rate, or the investment loan was partly used for something private. The split has to be made on what the ATO calls a fair and reasonable basis.

For time, the ATO gives a formula: the days the property was used to produce income plus the days it was held to produce income, divided by the days of the income year in which it was owned, multiplied by the expense. An empty day counts as a day held to produce income only if the property was available for rent on commercial terms. For a room in the owner's own home, empty days generally count as zero.

A worked example, with assumed figures: an owner holds a unit for all 365 days of the 2025-26 income year. It is let for 219 days, is empty but advertised on commercial terms for 73 days, and is used by the owner for the remaining 73 days. The income-producing days are 219 plus 73, or 292, and 292 divided by 365 is 80%. Of A$10,000 of council rates and interest, A$8,000 is deductible.

For space, when only part of a property is let, the ATO's method takes the floor area the tenant occupies alone, adds half of the area shared with the owner, and sets the total against the floor area of the whole property. Expenses that exist only because the property is let, such as advertising for tenants and a letting agent's commission, are not apportioned.

Family lets have their own treatment. Where the rent matches the market rate under normal commercial practice, the ATO treats the owner like any other, but expects the owner to be able to show how the market rate was worked out. Where relatives or friends pay less than the market rate, the property has a mixed use; if the deductible expenses come to more than the rent, the ATO accepts a claim limited to the rent received, which leaves neither a net rental income nor a loss. Where the payment is not assessable at all, nothing is deductible.

Interest when a loan is partly private

The ATO's interest page ties the interest deduction to what the borrowed money was used for, not to the property that secures the loan. Where the whole loan pays for a rental property that is let, or held for letting, all year, the whole of the interest is claimed. The claim covers borrowing to buy the property, to buy depreciating assets for it, to pay for deductible costs such as repairs, and to fund renovations and extensions. Interest prepaid up to 12 months ahead is accepted.

The limits are just as plain. No interest is claimed for any period in which the property is used privately, however short. The part of a loan used for a private purpose, a car in the ATO's example, is never deductible, whether it was drawn at the start or added on a refinance. A loan taken to buy a new home the owner lives in gives no deduction even when the rental property is the security.

A mixed loan has to be divided, and it stays divided. The ATO's example is a A$400,000 loan, of which A$380,000 bought the rental property and A$20,000 bought a car, carrying A$35,000 of interest in the year. The deductible share is A$35,000 multiplied by A$380,000 over A$400,000, which gives A$33,250, or 95%. That ratio applies for the life of the loan. In the ATO's words, "You can't only repay the portion of the loan for your private purchases": every repayment is spread across both parts.

Redrawn money takes the character of what it is spent on, so a private redraw creates a private slice inside an investment loan. A split loan, with sub-accounts, is read account by account.

Between people, the ATO follows ownership again. Joint owners each claim their share. A sole owner who borrowed jointly with someone else can claim all the interest where a written, enforceable agreement makes that owner liable for 100% of the repayments and the bank records show it.

Travel and second-hand assets since 2017

Two deductions that landlords once claimed were closed to most individual investors in 2017.

The first is travel. From 1 July 2017, the ATO says, no deduction is available for travel relating to a residential rental property: trips to inspect it, to maintain it, to collect rent or to visit the managing agent, whatever the cost: car, airfare, accommodation or meals. The exceptions are an owner who is in the business of letting rental properties and what the ATO calls excluded entities: a corporate tax entity, a superannuation plan that is not a self-managed fund, a public unit trust, a managed investment trust, and a unit trust or partnership made up only of those. The ATO adds that owning one rental property, or several, is generally not a business. Commercial premises are outside the rule. The Rental properties guide 2026 confirms that barred travel is not added to the cost base at sale either, so it is lost for both taxes.

The second is the decline in value of second-hand depreciating assets. The ATO defines such an asset as one that was already installed ready for use, or had been used, by someone else, in the owner's own residence, or for a non-taxable purpose other than an occasional one. In a rental property that generally means whatever was in the dwelling when it was bought, and whatever was in the owner's home before it was let. An investor claims for such an asset only if it was bought before 7:30pm (AEST) on 9 May 2017 and installed in the rental property before 1 July 2017. The ATO's expenses page states the bar by the first date and its page on second-hand assets by the second. The business and excluded-entity exceptions are the same as for travel.

The practical results follow from the definition. A buyer of an established rental cannot depreciate the carpet and other used assets that came with it. An owner who moves out and lets a former home on or after 1 July 2017 cannot depreciate what was already in it. In both cases a new asset bought for the rental is claimable. For a new or substantially renovated dwelling, the ATO allows the claim where nobody was previously entitled to a deduction for the assets and either nobody lived there before the purchase or the purchase took place within 6 months of the building work.

Depreciating assets: the A$300 line

The ATO describes depreciating assets as plant that is not part of the premises: items that are usually separately identifiable, unlikely to be permanent, and expected to be replaced within a relatively short time. Carpets, curtains, floating timber flooring, appliances and furniture are its examples.

An asset that costs A$300 or less is deducted in full in the year it is first used for the rental. The ceiling cannot be reached by splitting a purchase: the ATO's example is four dining chairs at A$250 each, which form a set costing more than A$300 and cannot be treated as four separate assets. Above A$300, the cost is deducted over the asset's effective life, taken either from the Commissioner of Taxation's determination or from the owner's own reasonable estimate. The decline starts when the asset is first used or installed ready for use, and it is reduced for any private use. Assets under A$1,000 may instead be grouped in what the ATO calls a low-value pool.

There are two methods. Prime cost spreads the deduction evenly: cost, multiplied by days held over 365, multiplied by 100% over the effective life. Diminishing value takes a constant share of what remains, so the early years carry more: the same formula with 200% in place of 100%. For a A$1,500 table bought on 1 July 2025 with an effective life of 5 years, the ATO computes A$300 for 2025-26 under prime cost, leaving A$1,200, and A$600 under diminishing value, leaving A$900.

Capital works at 2.5% a year

The building itself is not a depreciating asset. Its construction cost is claimed as capital works, which the ATO describes as the expense of building the property and of structural improvements, alterations and extensions. The rate is 2.5% a year over 40 years, or 4% a year over 25 years; the ATO page read for this guide does not say which properties take the higher rate.

Four conditions come with the deduction, according to the ATO. The building must have been constructed after 17 July 1985. The claim starts only once construction is fully complete. The property must be rented or available for rent on commercial terms. And the total can never exceed the construction expense. That expense includes preliminary costs such as architect, engineering and surveying fees, foundation excavation and building permits. The ATO's example is a carport costing A$3,500, completed on 1 July 2025: 2.5% of A$3,500 is A$87.50 a year, from the year of completion.

The line that matters most in practice runs between a repair, deducted at once, and an improvement, deducted at 2.5%. The ATO's example is a damaged fibre cement wall. Replacing it with plasterboard is a repair. Replacing it with a brick feature wall is an improvement. New kitchen cupboards are capital works; the new appliances beside them are depreciating assets. Repairs made before the first tenant moves in are capital as well, the ATO's travel page notes, and may be counted in the cost base at sale.

When expenses exceed rent

The Rental properties guide 2026 defines negative gearing in one sentence: a property is bought with borrowed funds and "the rental income is less than the deductible expenses (including interest on the borrowings)". The result is a net rental loss. The guide says the owner may deduct the full rental expenses against the rent and against other income such as salary, wages or business income, and that a loss larger than the other income is carried forward to the next income year. Positive gearing is the reverse: deductible expenses below the rent.

In that example A$6,400 of the A$37,400 of deductions, the capital works and the decline in value, matched no bill paid during the year. They are also the two that matter again at sale.

Because a rental loss lowers the tax due on wages, the guide says an owner may apply to the ATO for a pay as you go (PAYG) withholding variation, so that less tax is taken from each pay. In the other direction, the guide says an owner generally enters the PAYG instalments system with A$4,000 or more of business or investment income and a debt on assessment above A$1,000; the ATO notifies those concerned.

The ATO page on the reform does not define a new build.

Records to keep

The ATO's pages ask for a specific record at almost every step, and together they make a working file.

For a property not yet let, the evidence is of intention: the exchanges with agents or rental managers. For a family let at the market rate, it is the workings behind the rate. For a mixed loan, it is records accurate enough to calculate the rental part, and for a sole owner on a joint loan, the written agreement and the bank records. For depreciating assets, it is the record of how the decline in value was worked out. For those who can still claim travel, the ATO asks for a travel diary where the owner is away for 6 nights or more.

The longest-lived records are those of the property itself. The Rental properties guide 2026 says an owner must keep records of ownership and of all the costs of acquiring and disposing of the property, and that penalties can apply if they are not kept for at least 5 years after the sale or other capital gains tax event. The pages read for this guide do not state a separate retention period for the yearly income and expense records.

What the deductions do at sale

A rental property acquired after 19 September 1985 is subject to capital gains tax when it is sold, the Rental properties guide 2026 says. For real estate, the event normally happens on the day the contract is entered into, not at settlement. A gain arises to the extent that the capital proceeds exceed the cost base; a loss, to the extent that the reduced cost base exceeds the proceeds. Each co-owner makes a gain or a loss on their own interest.

The cost base holds the purchase price and the incidental costs of acquiring, holding and disposing of the property, such as legal fees, stamp duty and the selling agent's commission. These are the acquisition and disposal costs refused as rental deductions.

The yearly deductions then reach back in three ways:

1. Capital works. The guide says certain amounts the owner deducted, or can deduct, as capital works are excluded from the cost base and the reduced cost base. A lower cost base means a larger gain, so part of the 2.5% claimed each year is returned at sale. The guide gives no figures for the adjustment and refers to a separate ATO page, not read for this guide.
2. Depreciating assets. A sale that includes them triggers what the guide calls a balancing adjustment event for those assets. The capital proceeds are apportioned between the property and the assets, because the two have separate tax consequences.
3. Second-hand assets. Where the 2017 limit stopped an owner from claiming decline in value, the guide says disposing of the asset can produce a capital loss, or sometimes a gain.

The treatment of the gain is itself scheduled to change. According to the ATO's page on the 2026-27 Budget measures, from 1 July 2027 the 50% capital gains tax discount for individuals, trusts and partnerships is replaced by indexation of the cost base and a 30% minimum tax rate on capital gains, for gains that accrue after that date.

Every year's capital works claim is a deduction taken early: the building's cost base remembers it on the day the contract of sale is signed.

Kooky, from Shaka

Kooky edits Agents Estate and builds Shaka, the payment router he made for real estate professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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