Investing in property can provide both steady rental income and long-term capital growth. To make the most of these benefits, landlords need to understand how income is taxed, which expenses can be claimed, and how the cost base of a property affects Capital Gains Tax (CGT) when it is sold.
Rental Property Income
All amounts you receive in relation to a rental property must be declared as income, including:
- Rent payments – regular weekly or monthly rent.
- Bond money kept – for damage or unpaid rent.
- Insurance payouts – for lost rent or property damage.
- Lease-related payments – fees for lease termination or compensation.
- Short-term rental income – Airbnb, Stayz, or similar platforms.
- Non-cash benefits – goods or services received in place of rent, valued at market rates.
Rental Property Expenses
Investors are entitled to claim deductions for many of the costs incurred in earning rental income. These fall into two main categories:
- Immediate deductions (in the year incurred)
- Loan interest.
- Advertising for tenants.
- Property management fees.
- Council rates and land tax.
- Repairs and maintenance (fixing damage or wear and tear).
- Insurance (landlord, building, contents).
- Utilities (if paid by the landlord).
- Body corporate fees and charges.
- Capital deductions (over time)
- Capital works (Division 43) – building construction and structural improvements, usually claimed at 2.5% per year for 40 years
- Depreciating assets (Division 40) – such as carpets, appliances, and hot water systems (only if purchased new by the investor after 1 July 2017).
Repairs vs Improvements
- Repairs: deductible immediately (e.g. fixing a leaking pipe).
- Improvements: capital in nature (e.g. installing a new bathroom) and must be claimed as capital works or depreciation.
Cost Base and Reduced Cost Base
When you eventually sell the property, CGT applies to any capital gain. The gain (or loss) is calculated by comparing your sale proceeds with the cost base or reduced cost base.
Cost Base (used to calculate a capital gain)
The five elements of the cost base are:
- Purchase price.
- Incidental costs (stamp duty, legal fees, agent commissions, advertising).
- Ownership costs not otherwise deducted (interest, rates, land tax, insurance).
- Capital improvements (extensions, renovations) less any depreciation claimed.
- Legal costs to preserve or defend ownership.
Reduced Cost Base (used to calculate a capital loss)
The reduced cost base has similar elements, but excludes ownership costs such as interest, rates, and insurance — even if they weren’t claimed as deductions. This prevents investors from inflating capital losses.
By understanding these rules, investors can maximise deductions in the short term and reduce their CGT exposure in the long term.
– Heida Bell & Tim Arnold
Posted 03.10.2025
This article is compiled as a helpful guide for your private information and is subject to copyright. We suggest that you do not act solely on the basis of material contained in this article because items are of general nature only and may be liable to misinterpretation in particular circumstances. We recommend that our advice be sought before acting on any of these crucial areas.
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