Australia Rental Property Expenses Guide
Australian rental property expense deductions. The guide covers: the immediate rental deductions — the 'expenses directly related to the rental property' that are 'immediately deductible' in the 'income year' under the 'Section 8-1 of the ITAA 1997' (the 'general deduction' provision); the 'immediate deductions' include: (i) the 'interest on the loan' (the 'mortgage interest' for the 'rental property loan' — the 'interest on the loan used to purchase the rental property' is 'deductible'; the 'interest on the loan for the renovations' and the 'interest on the loan for the repairs' are 'deductible'), (ii) the 'council rates' and the 'water rates', (iii) the 'land tax' (the 'state land tax' paid on the 'rental property'), (iv) the 'strata levies' and the 'body corporate fees', (v) the 'insurance premiums' (the 'building insurance', the 'landlord insurance', the 'contents insurance'), (vi) the 'property management fees' (the 'agent fees' — the '7% to 12% of the rent'), (vii) the 'repairs and the maintenance' (the 'immediate repairs' — the 'repairs to restore the property to the previous condition' — BUT the 'improvements' and the 'renovations' are the 'capital works' and are NOT 'immediately deductible'), (viii) the 'advertising for the tenants' (the 'advertising costs' on the 'real estate websites' and the 'local newspapers'), (ix) the 'legal fees' for the 'lease preparation' and the 'tenant eviction' (BUT the 'legal fees for the purchase of the property' are the 'capital costs' and are 'added to the cost base' for the 'CGT'), (x) the 'travel for the property inspection' (the 'travel costs' for the 'landlord' to 'inspect the property' and 'meet the tenants'), (xi) the 'pest control', (xii) the 'gardening and the lawn mowing', (xiii) the 'electricity and the gas' (if the 'landlord pays the utilities for the tenant'), (xiv) the 'decline in value of the plant and equipment assets' (the 'depreciation of the plant and equipment' — the 'Division 40 deduction'); the capital works deduction (Division 43) — the 'capital works deduction' at the rate of 2.5% per year for the 'buildings' (the 'residential buildings' and the 'commercial buildings') constructed after the '15 September 1987'; the 'capital works deduction' is calculated as 2.5% of the 'construction cost' (the 'cost of the building construction' or the 'cost of the structural improvements'); the 'capital works deduction' is available to the 'owner' of the 'rental property' (the 'taxpayer who owns the property and derives the rental income'); the 'capital works deduction' is the 'decline in value of the building structure' (the 'capital allowance for the building'); the depreciation of the plant and equipment (Division 40) — the 'depreciation of the plant and equipment' (the 'decline in value of the 'plant and equipment assets' in the 'rental property') — the 'plant and equipment assets' include: the 'carpets', the 'window coverings', the 'blinds', the 'air conditioners', the 'heating systems', the 'hot water systems', the 'dishwashers', the 'cooktops', the 'ovens', the 'rangehoods', the 'ceiling fans', the 'exhaust fans', the 'smoke alarms', the 'security systems', the 'pool equipment', and the 'solar panels'; the 'depreciation' is calculated using the 'prime cost method' or the 'diminishing value method'; from the '1 July 2017', the 'residential property investors' can ONLY claim the 'depreciation' on the 'new plant and equipment' (the 'assets that are new and not previously used') — the 'second-hand assets' (the 'assets that were installed in the property before the purchase') are NOT 'eligible for the depreciation' (the 'Section 40-27 of the ITAA 1997' — the 'exclusion for the second-hand assets').
Immediate Rental Deductions
- Mortgage interest: The 'interest on the loan used to purchase the rental property' is 'immediately deductible'. The 'interest on the loan for the renovations' is 'deductible' (the 'renovation loan interest').
- Repairs vs improvements: The 'immediate repairs' (the 'restoration to the previous condition') are 'deductible'. The 'improvements' and the 'renovations' (the 'new kitchen', the 'new bathroom', the 'extension') are 'capital works' and are 'deductible at 2.5% per year'.
- Borrowing expenses: The 'loan establishment fees', the 'valuation fees', the 'mortgage stamp duty', and the 'lender's mortgage insurance' are 'deductible over 5 years' (the 'lower of 5 years or the term of the loan').
For the CGT on the sale of the rental property and the cost base, see our Property Tax Guide →.
Capital Works (Building Depreciation)
- 2.5% per year: The 'capital works deduction' at 2.5% per year applies to the 'buildings constructed after the 15 September 1987'. The 'deduction' is calculated on the 'construction cost' (the 'cost of the building' — NOT the 'purchase price of the property').
- Qualifying properties: The 'residential rental properties', the 'commercial properties', and the 'short-term rental properties' (the 'Airbnb' properties) may qualify for the 'capital works deduction'.
- Quantity surveyor report: The 'quantity surveyor' can prepare the 'capital works schedule' (the 'Section 43 schedule') to determine the 'construction cost' for the 'capital works deduction'.
For the property investment strategies and the negative gearing, see our Real Estate Investment Guide →.
Plant & Equipment Depreciation
- New assets only (post-2017): From the '1 July 2017', the 'residential property investors' can ONLY claim the 'depreciation' on the 'new plant and equipment' (the 'assets that are new and not previously used').
- Eligible assets: The 'carpets', the 'blinds', the 'air conditioners', the 'dishwashers', the 'cooktops', the 'curtains', the 'hot water systems', the 'ceiling fans', the 'smoke alarms', and the 'solar panels' are the 'eligible plant and equipment assets'.
For the motor vehicle tax deductions and the car expenses, see our Motor Vehicle Tax Guide →.