Tax Guide for Australian Landlords: Deductions, Records & Compliance (2026)

Self-managing means you're responsible for tracking rental income and expenses for tax purposes. The ATO is strict about proper documentation—around 9 in 10 landlords make errors on their returns, contributing to a $1.26 billion annual tax gap. But the process is straightforward if you stay organised.

This guide covers what you can claim, what you can't, and how to keep records that survive an audit.

This is Part 6 of our 6-part series on self-managing rental properties in NSW.

Quick Summary

• Declare all rental income including bond you keep at tenancy end
• Expenses fall into three categories: immediate deduction, over several years, or not deductible
• Repairs (fixing existing damage) are immediate; improvements (upgrades) are depreciated
• Get a quantity surveyor report ($400–700) to maximise depreciation claims
• Keep records for 5 years from when you lodge your return
• Property management fees being tax-deductible doesn't make them "free"—you still pay most of the cost

Link: ATO - Rental Properties Guide 2025

Rental Income Reporting

All rental income must be declared on your tax return.

What You Must Declare

• Regular rent payments
• Bond money when you keep it for damage (not when you first receive it)
• Insurance payouts for lost rent
• Any other payments from tenants

What You Don't Declare

• Bond lodged with Fair Trading — This isn't your money until you claim it
• Reimbursements from tenants for excess water usage (if it's a direct pass-through)

Evidence Required

Bank statements showing direct deposits are acceptable evidence. Keep:

• Date received
• Amount
• Which property (if multiple)
• Running total of income

Three Categories of Expenses

The ATO divides rental expenses into three categories:

1. Immediate Deductions (Claim Now)

Expenses you can claim in full in the year you incur them:

2. Deductions Over Several Years (Depreciation)

Expenses you claim progressively:

3. Not Deductible

Expenses you cannot claim:

• Purchase costs — Stamp duty, conveyancing, legal fees for purchase
• Selling costs — Agent commissions, legal fees for sale (added to cost base for CGT)
• Principal loan repayments — Only interest is deductible
• Travel to inspect property — No longer deductible for individual landlords
• Personal use periods — If you use the property yourself, apportion expenses
• Second-hand depreciation (post 9 May 2017) — Cannot claim Division 40 depreciation on existing plant and equipment in properties purchased after this date

Repairs vs Improvements

This distinction catches many landlords. Getting it wrong is a common audit trigger.

Repairs (Immediate Deduction)

Definition: Restoring something to its original condition or fixing wear and tear.

Examples:

• Fixing a leaking tap
• Replacing broken window panes
• Repairing damaged floorboards
• Patching holes in walls
• Fixing a broken hot water system

Improvements (Capital Works — Depreciate)

Definition: Upgrading, enhancing, or adding something new.

Examples:

• Installing a new kitchen (even if "replacing" the old one)
• Adding air conditioning where none existed
• Renovating a bathroom
• Extending the property
• Installing solar panels

The Grey Area: Replacements

When you replace an item, ask: Is the replacement substantially the same as what was there?

When in doubt, consult an accountant. Getting this wrong can trigger ATO scrutiny.

Depreciation

Depreciation lets you claim deductions for the gradual wear and decline in value of your property and its contents.

Division 43: Capital Works (Building Structure)

The building itself and permanently fixed items depreciate at 2.5% per year over 40 years.

Eligibility:

• Construction must have commenced on or after 16 September 1987
• You can only claim for periods the property is rented out

Example: Building cost $500,000 → $12,500/year deduction (for 40 years)

Division 40: Plant and Equipment

Removable or mechanical items depreciate at rates determined by their "effective life."

Examples:

• Carpet: 10 years
• Blinds: 6 years
• Dishwasher: 10 years
• Air conditioner: 10 years
• Hot water system: 12 years

Important limitation: For properties purchased after 9 May 2017, you can no longer claim Division 40 depreciation on existing (second-hand) plant and equipment. You can still claim for:

• Brand new items you install
• Properties where you were the first owner
• Capital works (Division 43) — this is not affected by the 2017 changes

Getting a Quantity Surveyor Report

A quantity surveyor inspects your property and produces a detailed depreciation schedule.

Cost: $400–700 (one-time, tax-deductible)

Value: Can identify $5,000–15,000+ in annual deductions, especially for newer properties. The fee typically pays for itself many times over.

Recommendation: Get a report for any property built after 1987. Even for older properties, the Division 43 deductions alone usually justify the cost.

Link: ATO - Depreciating Assets in Rental Properties

Negative Gearing

If your rental expenses exceed your rental income, the loss can offset your other taxable income. This is called negative gearing.

How It Works

If your salary is $100,000, your taxable income becomes $93,400.

At a 30% marginal tax rate (the $45,001–$135,000 bracket since the Stage 3 tax cuts), that $6,600 loss saves you $1,980 in tax.

Is Negative Gearing "Good"?

Negative gearing reduces your tax bill, but you're still losing money in cash terms. The benefit is that the ATO subsidises part of your loss.

Over time, as:

• Rent increases
• Interest decreases (as you pay down the loan)
• Property appreciates in value

...most properties move from negatively geared to positively geared.

"But Property Management Fees Are Tax Deductible..."

A common justification for using property managers: "The fees are tax deductible anyway."

This is true but misleading. Tax deductions aren't free money—you only get back your marginal tax rate.

The Real Maths

Property management fees of $4,000/year at $700/week rent:

Even at the highest tax bracket, you're still paying $2,200 for a service that mostly forwards emails.

Over 10 years:

• Highest earner saves: $22,000 by self-managing
• Average earner saves: $28,000 by self-managing

The tax deduction softens the blow, but it doesn't make property management free. And tools like Propero are also tax-deductible—so you get the systems without the markup.

Record Keeping

The ATO requires records for 5 years from when you lodge your return.

What to Keep

• Lease agreements (all versions)
• Rental ledger — A proper rental ledger tracking all rent payments, dates, and running balance (bank statements alone aren't enough)
• All expense receipts and invoices (with ABN for tradies)
• Depreciation schedule (quantity surveyor report)
• Bond lodgement and claim documentation
• Correspondence with tenants (maintenance requests, notices)
• Inspection reports and photos
• Loan statements (showing interest portion)
• Insurance policies and receipts

Digital Records Are Fine

The ATO accepts digital records. Ensure:

• Images are clear and readable
• Files are backed up (cloud storage recommended)
• File names are logical and searchable
• You can locate any record if requested

Organising Your Records

Create a folder structure:

Rental Property - 12 Smith St
├── 2024-25 Financial Year
│   ├── Income
│   │   └── Rent Statements
│   ├── Expenses
│   │   ├── Interest
│   │   ├── Rates and Fees
│   │   ├── Insurance
│   │   ├── Repairs and Maintenance
│   │   └── Other
│   ├── Depreciation
│   └── Documents
│       ├── Lease
│       ├── Inspections
│       └── Correspondence
├── 2025-26 Financial Year
│   └── (same structure)
└── Permanent
    ├── Purchase Documents
    ├── Quantity Surveyor Report
    └── Loan Documents

End of Year Process

Before tax time:

1. Reconcile rent received against bank statements
2. Gather all expense receipts
3. Update depreciation schedule
4. Calculate any periods of personal use or vacancy
5. Prepare summary for your accountant (or tax return)

Apportionment

If your property isn't rented for the full year, you must apportion expenses.

When Apportionment Applies

• Vacancy periods — Property genuinely available for rent but empty (still deductible)
• Personal use — You use the property yourself (not deductible for that period)
• Private proportion — Part of loan used for non-rental purposes

Example

You rent your beach house for 9 months and use it personally for 3 months:

• You can only claim 75% of your expenses
• This applies to interest, rates, insurance, depreciation—everything

Be honest. The ATO receives data from rental bond authorities and can identify discrepancies.

Capital Gains Tax (CGT)

When you sell your investment property, you may pay CGT on any profit.

Calculating CGT

Capital gain = Sale price − Cost base

Cost base includes:

• Purchase price
• Stamp duty and legal fees (on purchase)
• Capital improvements (renovations, additions)
• Non-deductible borrowing costs

Cost base does NOT include:

• Deductible expenses (repairs, interest, rates)
• Depreciation already claimed

50% CGT Discount

If you hold the property for more than 12 months, you receive a 50% discount on the capital gain.

Example:

• Sell for $800,000
• Cost base: $500,000
• Gross capital gain: $300,000
• After 50% discount: $150,000
• This $150,000 is added to your taxable income for that year

Main Residence Exemption

If the property was ever your main residence, you may receive a partial exemption. This is complex—consult an accountant.

Link: ATO - Capital Gains Tax

Getting Professional Help

Consider using a tax accountant who specialises in property investment. They know:

• All available deductions
• Optimal timing for expenses
• How to structure your affairs efficiently
• Current ATO focus areas

Cost: $200–500 for rental property tax return preparation

The fee is tax-deductible, and a good accountant typically saves you more than their cost.

What's Next

This completes our 6-part series on self-managing rental properties in NSW.

Full Series:

1. Is Self-Managing Right for You?
2. NSW Rental Laws Every Landlord Must Know
3. Finding Your First Tenant
4. Day-to-Day Property Management
5. When Things Go Wrong
6. Tax Guide for Australian Landlords (this post)

Sources & Further Reading

• ATO - Rental Properties Guide 2025 — Official guide
• ATO - Rental Expenses — What you can claim
• ATO - Depreciating Assets — Division 40 guidance
• ATO - Capital Works Deductions — Division 43 guidance
• ATO - Capital Gains Tax — CGT information