Property remains a popular investment choice for Australians, but the tax treatment is often more complicated than investors expect. Rental income must be declared, expenses must be classified correctly, private use must be excluded and detailed records may need to be retained until well after the property is sold.
The 2026–27 Federal Budget also introduced major reforms to negative gearing and capital gains tax. Although the key changes generally commence from 1 July 2027, property acquired after the Budget announcement on 12 May 2026 may be treated differently from property already held at that time.
This guide explains the main tax issues property investors should understand in 2026.
Declare All Rental and Rental-Related Income
Rental income must generally be included in the owner’s tax return in accordance with their legal ownership interest. This includes ordinary rent and may also include amounts such as retained bond money, insurance payments received for lost rent, reimbursements and income earned through short-stay accommodation platforms.
Where a property is jointly owned, income and expenses generally need to be divided according to the owners’ legal interests. A different private arrangement about who receives the rent or pays the expenses does not necessarily change the tax treatment. The ATO’s 2026 rental property guidance addresses rental income, co-ownership, deductible expenses and record keeping.
Common Investment Property Tax Deductions
Depending on the circumstances, property investors may be able to claim immediate deductions for expenses such as:
- Interest on money borrowed to purchase the rental property
- Council rates and water charges
- Land tax and eligible statutory charges
- Property management fees
- Landlord insurance
- Advertising for tenants
- Cleaning and gardening
- Eligible repairs and maintenance
- Accounting and tax agent fees
- Certain body corporate administration fees
Only the interest component of a loan repayment is potentially deductible. Repayment of the loan principal is not deductible. If borrowed funds are used partly for private purposes, the interest expense must be apportioned, even when the rental property secures the entire loan.
The ATO divides rental expenses into three categories: expenses deductible immediately, expenses claimed over several years and expenses that cannot be claimed. Correct classification is important because an immediate deduction may not be available merely because an amount was paid during the year.
Repairs, Improvements and Initial Repairs
Repairs that restore an existing item to its former condition may be immediately deductible. Replacing an entire asset, improving the property beyond its original condition or completing structural work will commonly be capital in nature.
For example, repairing a damaged section of a fence may be treated differently from replacing the entire fence with a superior structure. Work required when the property was acquired, often called an initial repair, is also generally not immediately deductible if it addresses damage or deterioration that existed at the time of purchase.
Capital expenditure may instead qualify for capital works deductions, depreciation or inclusion in the property’s CGT cost base, depending on the nature of the expense. Investors should keep invoices that clearly describe the work completed.
Depreciation and Capital Works
Some property-related costs are claimed over time rather than deducted immediately.
Capital works deductions may be available for eligible construction expenditure, structural improvements and certain renovations. Separately identifiable depreciating assets may be claimed through decline-in-value deductions where the relevant conditions are satisfied.
Restrictions apply to second-hand depreciating assets in residential rental properties acquired after 9 May 2017. In many cases, an investor cannot claim depreciation on previously used items included with an established residential property, although the expenditure may still be relevant when calculating a future capital gain or loss.
A professionally prepared depreciation schedule can help identify eligible capital works and depreciating assets, but the final tax treatment should be reviewed against the investor’s circumstances and supporting documents.
Private Use and Holiday Homes
Expenses must be apportioned when a property is available for private use, rented below market value or not genuinely available for rent.
The ATO released updated guidance in May 2026 dealing with rental properties that also operate as holiday homes. Where a holiday home is not mainly used or held for producing assessable rental income, deductions for ownership and use expenses may be denied. This can include interest, rates, body corporate fees, capital works and depreciation. Certain direct costs connected with earning rental income, such as platform commissions, guest cleaning and advertising, may remain deductible.
Where a property is mainly used to earn rental income but has some private use, expenses must be apportioned. Investors should retain calendars, booking records, advertisements, agent correspondence and evidence showing when the property was genuinely available to the public.
How Negative Gearing Works in 2025–26
A property is negatively geared when deductible rental expenses exceed assessable rental income. Under the rules applying to the 2025–26 tax return, an eligible net rental loss can generally be applied against the investor’s other assessable income.
The reforms announced in the 2026–27 Budget do not apply to the 2025–26 tax return. The ATO specifically confirms that the recent negative gearing changes do not affect rental expense claims for that year.
Negative Gearing Changes from 1 July 2027
From 1 July 2027, negative gearing for residential property will generally be limited to new builds. Residential properties held before 7:30 pm AEST on 12 May 2026 are grandfathered and remain exempt from the new limitation.
For established residential property acquired after that time, rental losses will generally no longer be available to offset unrelated income such as salary or wages. The losses may instead be applied against other residential property income, including relevant capital gains, with unused amounts carried forward for future years.
New residential builds remain eligible for negative gearing treatment, subject to the qualifying conditions. Further legislation dealing with detailed circumstances and the definition of a new dwelling was still being implemented in additional tranches during August 2026. Investors entering contracts after Budget night should therefore confirm the treatment of the particular property before relying on expected tax deductions.
Capital Gains Tax Changes
Capital gains tax may apply when an investment property is sold. Under the current framework, an eligible Australian-resident individual or trust may generally obtain a 50% CGT discount after holding the property for at least 12 months.
From 1 July 2027, the Government will replace the 50% CGT discount for affected individuals, trusts and partnerships with cost-base indexation and a minimum 30% tax rate on capital gains. The reforms apply only to gains accruing from 1 July 2027, rather than retrospectively taxing the entire historical gain. Investors in qualifying new builds may be able to choose between the existing discount and the new arrangements.
Accurate market values and cost-base records will become increasingly important. Investors should retain purchase and sale contracts, settlement statements, stamp duty records, legal costs, renovation invoices and evidence of capital improvements.
Keep Records Beyond the Annual Tax Return
Rental property records generally need to demonstrate both the amount spent and the connection between the expense and earning rental income. Receipts, loan statements, property manager reports and depreciation schedules should be maintained carefully.
Documents affecting the CGT cost base may need to be retained for at least five years after the property is sold and the relevant CGT event is reported. Annual tax returns alone may not contain enough detail to reconstruct historical expenditure many years later.
Property Tax and Accounting Support
Investment property tax is not simply a matter of adding rental income and subtracting every property-related payment. Loan use, private occupancy, repairs, depreciation, ownership structure and the purchase date can all change the result.
Kintax Accountants assists property investors with rental schedules, deduction reviews, depreciation treatment, negative gearing calculations, CGT cost bases and tax planning before the purchase or sale of an investment property.
Contact Kintax Accountants
Phone: 0399393692
Email: info@kintax.com.au
Office: Level 1, 287A Spring Street, Reservoir VIC 3073
Enquiries: Request a consultation
Based in Reservoir, Kintax Accountants supports property investors throughout Melbourne’s northern suburbs and greater Melbourne.
Important information: This article provides general tax and accounting information only. It does not constitute financial product, investment, credit or legal advice. Tax outcomes depend on the ownership structure, property use, financing arrangements, acquisition date and individual circumstances. Obtain professional advice before purchasing, restructuring or selling an investment property.
