Updated for the 2026–27 financial year
Stamp duty on the purchase of an investment property is a capital cost. It is not immediately deductible, but it does form part of the property’s cost base for capital gains tax purposes, which reduces the capital gain you are taxed on when you eventually sell. Beyond that, owning an investment property can reduce your tax in several other ways. Rental income is taxable, but a wide range of expenses, depreciation and capital works deductions can be claimed against that income. When your deductible costs exceed your rental income, the net loss can reduce the tax you pay on your other income. This guide explains how it all fits together in plain language.
How An Investment Property Reduces Your Tax
When you own a rental property, the rent you receive is added to your assessable income and taxed alongside your salary and any other income. The benefit comes from the deductions you can claim against that rental income. These deductions fall into three broad categories the ATO sets out: expenses you can claim immediately in the year you incur them, expenses you claim over several years, and expenses you cannot claim at all.
If your deductible expenses for the year add up to more than your rental income, you make a net rental loss. That loss can be used to reduce your other taxable income, such as your wages. This is the concept commonly known as negative gearing. The amount of tax you save depends on your marginal tax rate and your overall circumstances, so the value differs from person to person.
What Is Negative Gearing And How Does It Reduce Tax
Negative gearing happens when the ongoing costs of holding an investment property are greater than the rental income it produces. In that situation you are running the property at a loss. Because the property is held to produce income, that loss can generally be offset against your other taxable income, lowering your overall tax bill.
Interest on a loan used to buy an income producing property is typically one of the larger holding costs an investor faces. Other holding costs include council rates, insurance, property management fees and repairs. When these costs combined exceed the rent received, the resulting loss reduces your taxable income. The trade off is that you are out of pocket on cash flow in the short term, with the expectation of a capital gain over the longer term.
Positive gearing is the opposite. If your rental income is higher than your holding costs, you make a net rental profit, which increases your taxable income and the tax you pay.
Rental Expenses You Can Claim
You can claim a deduction for many expenses you incur for the period your property is rented or genuinely available for rent. The ATO groups rental expenses into three categories: those you cannot claim, those you can claim an immediate deduction for in the year you incur them, and those you claim over several income years. The expenses below are generally claimed immediately:
- Loan interest on money borrowed to buy the property
- Council rates
- Land tax
- Building and landlord insurance
- Property management and agent fees and commissions
- Body corporate fees and charges
- Advertising for tenants
- Cleaning, gardening and pest control
- Repairs and maintenance
You cannot claim expenses that are capital or private in nature. You can read the full breakdown of claimable and non claimable expenses on the ATO rental expenses page.
Expenses You Cannot Claim
Some costs cannot be deducted at all. These include:
- Expenses you do not actually incur, such as water or electricity usage charges paid by your tenants
- Expenses for any period the property was not genuinely available for rent, including private use of a holiday home
- Costs of holding vacant land in many circumstances
- Travel expenses relating to a residential rental property, unless you are carrying on a business of letting rental properties or you are an excluded entity
- Acquisition and disposal costs such as the purchase price, conveyancing costs, buyer’s agent fees and stamp duty on the transfer of the property
The rules for vacant land changed for land held from 1 July 2019. Holding costs such as interest, land tax, council rates and maintenance on vacant land are only deductible in limited circumstances, for example where the land is held by an excluded entity or is used in a business. Land is treated as vacant if it does not contain a substantial and permanent structure, or contains residential premises that are not yet able to be lawfully occupied or made available for rent. These rules are explained in Taxation Ruling TR 2023/3. Acquisition and disposal costs that you cannot deduct may instead form part of the property’s cost base for capital gains tax purposes.
Borrowing Expenses And Loan Stamp Duty
Borrowing expenses are the costs of taking out the loan itself, as distinct from the cost of buying the property. These can include loan establishment fees, lender’s mortgage insurance, fees for preparing and filing mortgage documents, title search fees, and stamp duty charged on the loan or mortgage rather than on the property transfer. Borrowing expenses are generally claimed over time rather than all at once in the year you incur them.
It is worth noting the difference between the two kinds of stamp duty here. Stamp duty on the transfer of the property is a non deductible acquisition cost. However, stamp duty on a lease of property is treated as a lease document expense rather than a non deductible acquisition cost.
Can You Claim Stamp Duty On An Investment Property
Stamp duty, also called transfer duty, is a tax charged by state and territory governments on certain transactions, including the transfer of a property. When you buy an investment property, the stamp duty you pay on the purchase is a capital cost. It is not immediately tax deductible.
Instead, stamp duty forms part of the second element of your property’s cost base for capital gains tax purposes. That means it reduces the capital gain you are taxed on when you sell, which can lower your CGT liability down the track. Other capital costs that work the same way include legal fees, conveyancing and pest inspection fees incurred when acquiring the property.
Because each state and territory calculates stamp duty differently, the amount payable on two similarly priced properties can vary depending on where they are located. The timing of when stamp duty is payable also differs across jurisdictions.
Exception: Where an investment property is acquired in a Territory under a crown lease, the stamp duty and costs incurred to acquire the crown lease can be immediately tax deductible. This is a narrow exception, so it is worth confirming whether it applies to your situation.
You can read more about how stamp duty is treated for property investors on this stamp duty explainer.
Repairs And Maintenance Versus Capital Improvements
One of the most common areas investors get wrong is the difference between a repair and an improvement. Getting this right matters because the two are treated very differently for tax.
Repairs and maintenance are expenses to fix damage or deterioration from normal wear and tear, or to keep the property in its current condition. These are immediate deductions, meaning you can claim the full amount in the same income year you incur the cost. Examples include fixing a leaking tap or pipe, replacing a few broken roof tiles, painting a wall to restore it, or repairing a damaged section of flooring or fencing.
Improvements, also called capital works, alter the property to increase its value, extend its life, or adapt it to a new or different use. These cannot be deducted in the year you incur them and must instead be depreciated over time. Examples include adding a new bathroom or bedroom, renovating a kitchen with higher end fittings, installing air conditioning or solar panels, building a garage or pergola, or installing a swimming pool.
Example: If a leaking shower is isolated and the leak is plugged, that is a repair you can claim immediately. But removing and replacing the entire shower unit and retiling to modernise the bathroom is an improvement. Likewise, patching a small leaking section of roof is a repair, while replacing the whole roof with modern materials is a capital improvement. Replacing a few damaged floorboards is a repair, but upgrading all of the flooring is likely an improvement.
Replacing a damaged item with a significantly upgraded version, or expanding a repair beyond what was originally damaged, is generally classified as an improvement rather than a repair. You can find more worked examples on this repairs versus improvements guide.
Property Depreciation And Capital Works
Depreciation lets you claim the gradual decline in value of a building and the assets within it. There are two distinct types. The first is the capital works deduction, which applies to the building structure itself. The second is the decline in value of plant and equipment, which covers the removable assets and fittings inside the property. Both can deliver meaningful deductions, but each has its own rules.
Capital Works Deductions On Buildings
As a general rule, you can claim a capital works deduction for the cost of construction over 40 years from the date construction was completed. The standard rate is 2.5% per year, which spreads the claim over 40 years. A 4% rate, spread over 25 years, applies to certain buildings depending on when construction commenced and how the building is used.
For residential or income producing buildings, construction must have commenced after 17 July 1985 to be eligible. Where construction commenced between 18 July 1985 and 15 September 1987 the rate is 4%, and from 16 September 1987 onwards the rate is generally 2.5%.
Example: In an ATO example, a residential townhouse with construction costs of $500,000 and a 2.5% rate gives an annual capital works deduction of $12,500.
You can only claim capital works deductions for the periods the property was used to produce income, and only once construction is completed. The construction cost cannot be the purchase price of the building and land, the insured cost, or the replacement cost. If you cannot determine the actual construction costs, you can obtain an estimate from a quantity surveyor or other independent qualified person, and the fee you pay for that estimate is itself deductible. Importantly, any capital works deduction you claim must be taken into account when you work out your capital gain or loss on sale. The full detail is set out on the ATO capital works deductions page.
New Versus Second Hand Plant And Equipment
Plant and equipment refers to the removable assets and fittings in a property, such as appliances, blinds, carpet and air conditioning units. The rules changed significantly a few years ago for second hand assets in residential rental properties.
Second hand depreciating assets are generally those that were already in a property when you bought it, or assets that were in your own private residence before you rented the property out. You generally cannot claim a deduction for the decline in value of these second hand assets in a residential rental property.
There are exceptions. You can claim for second hand depreciating assets only if you purchased the asset before 7:30 pm AEST on 9 May 2017 and installed it into your rental property before 1 July 2017. You can also claim if you are carrying on a business of letting rental properties, or if the property is owned by an excluded entity such as a corporate tax entity, a public unit trust, a managed investment trust, or a superannuation plan that is not a self managed super fund.
The good news is that new depreciating assets you buy for the rental property, which were not previously used, can still be claimed for their decline in value. If you turn your own home into a rental on or after 1 July 2017, you cannot claim depreciation on the assets that were already in your home, but you can claim it on new assets you buy for the rental. The detailed rules are on the ATO second hand depreciating assets page.
Capital Gains Tax When You Sell
If you sell your investment property for a profit, that profit is a capital gain and must be declared on your income tax return. The capital gain is added to your taxable income, and the capital gains tax you pay is the additional tax that results from including that gain. For individual investors, CGT is not a separate tax with its own rate. It is taxed at your marginal tax rate because the gain forms part of your taxable income.
The basic formula is: the selling price minus transaction costs, less the original purchase price plus associated transaction costs, equals your capital gain or loss. Expenses that can be added to the cost base include stamp duty, legal fees, renovation costs and sales agent commissions. CGT is payable regardless of how you use the sale proceeds and regardless of how much loan is still outstanding at the time of sale. You can read a fuller explanation on this capital gains tax guide.
The 50% CGT Discount And Who Qualifies
If you have owned your investment property for at least 12 months before selling it, you can claim a 50% discount on the capital gain. This applies to sales in 2025–26 and 2026–27; from 1 July 2027 the discount is replaced, as explained in the legislated changes section below. Under the discount method, you work out your capital gain by subtracting the cost base from the sale proceeds, then multiply the gain by 50% to find the taxable portion.
Example: If your capital gain is $72,000 and you held the property for four years, applying the 50% discount results in a taxable capital gain of $36,000.
The discount method is used more often than the indexation method. Indexation only applies to properties purchased before 21 September 1999, where the cost base could be increased by an indexation factor. Where a property is owned by more than one person, the capital gain is split between the owners based on the title deed.
The 6 Year Main Residence Rule
A main residence, your home as defined by the ATO, is generally exempt from CGT. The six year rule, legislated under Section 118-145 of the Income Tax Assessment Act 1997, lets you rent out your former home for up to six years and continue treating it as your main residence for CGT purposes.
If you sell within the six year window and you have not nominated another property as your main residence during the same period, you pay zero CGT on the sale. There are conditions. The property must have been your genuine principal place of residence before you moved out; you cannot rent it first and then move in to claim the exemption. The six year clock starts on the day you first make the property available for rent, and the window is six cumulative years of income producing absence per period. Moving back in and re establishing the property as your home resets the clock, and the six year limit then applies separately to each period of absence.
You must sign the sale contract within the six year window and be an Australian resident for tax purposes when that CGT event occurs. Since 1 July 2020, foreign residents are generally not entitled to claim the main residence exemption, including the six year rule. The rule applies to individuals and does not extend to properties held in a company or trust structure. While you are renting the property under this rule, you can still claim normal rental deductions such as loan interest, property management fees, council rates, insurance and repairs, and you must declare the rental income. You can read a detailed explanation on this main residence six year rule guide.
Ownership Structure And Splitting Income
How a property is owned affects how the rental income, deductions and any capital gain are shared. Where a property is owned by more than one person, the rental income and deductions are split between the co owners according to the ownership shares on the title deed, and any capital gain on sale is split the same way.
Property can be held in an individual name, jointly, or through a trust or company. Each structure has different tax outcomes and different rules, and the right choice depends on your circumstances and goals. When a property is transferred to a relative, the market value is treated as the sale value for CGT purposes regardless of whether money actually changes hands. Because ownership structure has long term consequences, it is worth getting tailored advice before you buy.
Access Your Tax Benefit During The Year
If your property is negatively geared, you do not have to wait until you lodge your tax return to feel the benefit. A PAYG withholding variation lets you reduce the amount of tax withheld from your wages during the year, so you receive the benefit of your expected deductions in each pay rather than as a single lump sum refund at tax time. This can help with cash flow, particularly for investors claiming larger than usual deductions. The application is made to the ATO each year, either by you or by your accountant.
Record Keeping And ATO Compliance
Good records are essential. Keep receipts, invoices, and before and after photos of any work done. When you engage a contractor, ask them to clearly describe the nature of the work on their invoice, so it is easy to show whether a job was a repair or an improvement.
The ATO uses data matching technology to compare claims across suburbs, property types and industry benchmarks. Deductions that appear excessive or inconsistent may prompt a closer look, so accuracy matters.
There is also a withholding obligation to be aware of. If you pay a contractor for services on your rental property and they do not provide an ABN, you may need to withhold 47% of that payment and pay it to the ATO. To do this you need to register for a PAYG withholding account if you do not already have one. If you fail to withhold where you were required to, you may not be able to claim a deduction for those expenses.
Legislated Changes To Investor Tax Breaks From 1 July 2027
Negative gearing and the 50% CGT discount both change from 1 July 2027 under laws passed after the 2026–27 Federal Budget. Negative gearing for residential property investments will be limited to new builds, with properties held at 7:30pm AEST on 12 May 2026 exempt from that change. The 50% CGT discount for individuals, trusts and partnerships will be replaced by cost base indexation and a 30% minimum tax rate on capital gains, applying only to gains that accrue after 1 July 2027, and the main residence exemption is unchanged. For context, the federal government’s estimated revenue foregone from the main residence exemption alone was around $47.5 billion in 2023-24, which gives a sense of how significant property tax concessions are to the budget. Because the rules are changing, base your decisions on the law that applies in the year you buy or sell and seek up to date advice before making a major investment move.
Frequently Asked Questions
Can you claim stamp duty back on an investment property?
Stamp duty on the purchase of an investment property is a capital cost and is not immediately deductible. Instead it forms part of the property’s cost base and reduces your capital gain when you sell. An exception applies for a property acquired in a Territory under a crown lease, where the stamp duty can be immediately deductible.
How can you legally reduce tax on rental income?
You can claim the deductible expenses you incur while the property is rented or genuinely available for rent, such as loan interest, council rates, insurance, property management fees and repairs, plus depreciation and capital works deductions. If your deductible costs exceed your rental income, the net loss can reduce your other taxable income.
What is the six year rule?
It allows you to rent out a former home for up to six years and still treat it as your main residence for CGT, so a sale within that window with no other nominated main residence can result in zero CGT. The property must have genuinely been your home first, and foreign residents are generally excluded since 1 July 2020.
Do depreciation rules differ for second hand properties?
Yes. You generally cannot claim the decline in value of second hand depreciating assets in a residential rental property unless you purchased the asset before 7:30 pm AEST on 9 May 2017 and installed it before 1 July 2017, or you are an excluded entity. New assets you buy for the rental can still be depreciated.
How is the 50% CGT discount calculated?
If you have held the property for at least 12 months, you subtract the cost base from the sale proceeds to find the capital gain, then multiply by 50%. For example, a $72,000 gain becomes a $36,000 taxable capital gain after the discount.
Get Tailored Advice From Tax Window
Owning an investment property opens up real tax savings, but the rules are detailed and the wrong call can cost you. The difference between a repair and an improvement, the timing of depreciation claims, how stamp duty flows into your cost base, when the six year rule applies, and which ownership structure suits you all depend on your individual circumstances. Getting these right from the start protects your deductions and keeps you on the right side of the ATO.
If you would like a clear answer on how these rules apply to your property and how to legally pay less tax, a short conversation with a Tax Window adviser is the simplest next step. We can review your situation and set out a plan that fits your goals.
About The Author: Artur Osadchiy
Artur is a Certified Practising Accountant with over 30 years’ experience working as a trusted advisor to 600+ clients across Australia. Based in Melbourne, he started Tax Window with his wife Marina in 2009 and leads the firm’s tax and accounting team. In his free time, Artur enjoys watching the AFL (go Kangas!) and spending time with family.
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