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Income tax: rental property income and deductions for individuals who are not in business

Rental properties remain a strong investment choice in Australia. Many owners rely on rental income to support long term financial goals. As with any investment, tax plays a major role in your net return. The Australian tax system allows a range of deductions for rental-related expenses. It also sets rules on how income and expenses must be treated each year.

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This guide explains rental income, allowable deductions, timing issues, repairs, capital improvements, interest, and common mistakes. It is written for everyday investors who want clear information without confusion. Trinity Accounting Practice supports property investors with full tax and accounting advice from our office at 159 Stoney Creek Road Beverly Hills NSW 2209. Phone 02 9543 6804.

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What counts as rental income

Rental income is any payment you receive for the right to occupy your property. Common forms include:

Regular rent from tenants.
Bond money kept due to damage or unpaid rent.
Insurance payouts for lost rent.
Booking fees through short stay platforms.
Payments from family members if they are considered tenants.

You must include this income in your tax return for the year you receive it. If rent is paid in advance, it is still taxable in the year received.

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What you can claim as deductions

The tax law allows deductions for expenses you pay to earn rental income. These costs must relate directly to the property. They must not be private or capital in nature. They must be supported by records.

Typical deductible expenses include:

Interest on investment loans.
Repairs and maintenance to fix damage from tenants.
Agent fees and property management charges.
Council rates and water rates.
Land tax when applied under state rules.
Insurance for building, landlord protection and public liability.
Cleaning costs.
Gardening and lawn work.
Advertising for new tenants.
Travel expenses if the property is managed as a business and meets strict rules.
Pest control.
Body corporate fees when the levy covers maintenance.

Some expenses are not deductible immediately. These must be claimed over time. These include capital works and building improvements.

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Timing rules for rental deductions

The timing of deductions is important. An expense is deductible in the year you incur it, not when you pay it. An invoice received in June but paid in July is deductible in the earlier year. You need to keep accurate dates for all invoices.

The same rule applies for rent. You declare rent in the year the tenant pays it, even if the period covers future months.

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Repairs, maintenance and capital improvements

Many investors claim repairs incorrectly. The tax outcomes between repairs and capital work differ strongly.

A repair fixes damage from wear and tear or tenant actions. It restores the property to its original condition. Examples:

Fixing a leaking tap.
Replacing broken windows.
Patching damaged walls.
Repairing a faulty stove.

Repairs are deductible in full in the year incurred.

Maintenance keeps the property in working order. Examples:

Cleaning gutters.
Servicing air conditioning.
Repainting high use areas.

Maintenance is also deductible in full.

Capital improvements are different. These improve the property beyond its original condition. They increase value or extend its life. Examples:

Full kitchen replacement.
Adding a second bathroom.
Renovating the entire property.
Installing new fencing.

Capital improvements are not fully deductible at once. They are claimed over many years as capital works deductions at 2.5 percent per year.

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Initial repairs and why they are not deductible

If you buy a property in poor condition and repair it before renting it out, these initial repairs are capital in nature. They relate to putting the property into a suitable state for income production. They are not deductible immediately. They form part of the cost base for capital gains tax.

Examples of initial repairs:

Fixing structural damage present at purchase.
Repairing broken fixtures identified in the pre-purchase inspection.
Full repainting due to long term neglect.
Replacing rotten flooring before the first tenant moves in.

These costs are not deductible as repairs. They must be added to cost base or claimed as capital works where applicable.

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Borrowing expenses and interest

Interest on your investment loan is deductible if the loan is used to buy or improve the rental property. The interest must relate directly to the property. If part of the loan is used for private spending, interest must be split.

Borrowing expenses such as loan establishment fees, title search fees and lender’s mortgage insurance are deductible over five years.

You must keep clear loan statements to support each claim.

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Vacant rental properties

Expenses for a vacant property remain deductible if the property is available for rent. You must show genuine effort to attract tenants. Advertising, agent listings and reasonable rental pricing help support the claim.

If the property is held for personal reasons without attempt to rent it, deductions cannot be claimed.

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Shared properties and private use

If you use the property personally for any part of the year, you must apportion expenses. This includes holiday homes and short stay rentals.

For example, if you use the property for four weeks and rent it for forty eight weeks, you claim one divided by thirteen of the yearly expenses as private. The remaining portion is deductible.

Private use includes stays by friends or family who pay reduced rent.

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Body corporate fees

Body corporate levies that relate to maintenance, management or administration are deductible. Levies used for capital improvements are not deductible immediately. These amounts are treated as capital works.

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Depreciation and capital works

Two main systems apply.

Capital works deductions cover building structure and permanent items. They are claimed at 2.5 percent per year over forty years.
Depreciation covers plant and equipment such as carpets, appliances and furniture. Depreciation rules changed in recent years, so you need advice to ensure correct treatment.

A quantity surveyor report is recommended for detailed claims.

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Insurance claims

Insurance payouts for lost rent, repairs, or damage are treated as income. You must include them in your return. If insurance covers a capital improvement, you may need to adjust your cost base.

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Sale of the property and CGT

Capital gains tax applies when you sell your rental property. The gain is based on your sale price minus cost base. The cost base includes:

Purchase price.
Stamp duty.
Legal fees.
Initial repairs.
Capital improvements.
Selling costs.

If the property was held longer than twelve months, individuals may be eligible for the fifty percent discount.

You cannot double-claim any items already deducted previously.

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Common errors made by property investors

Claiming initial repairs as immediate deductions.
Claiming private travel as rental expenses.
Claiming deductions for periods when the property was not available for rent.
Incorrectly claiming capital improvements as repairs.
Not apportioning for private use.
Poor record keeping.
Using the wrong depreciation rates.
Claiming interest on private portions of mixed-purpose loans.

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More details here https://www.ato.gov.au/law/view/document?docid=DTR/TR2025D1/NAT/ATO/00001

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How Trinity Accounting Practice supports rental investors

Trinity Accounting Practice works with property investors across Australia. We prepare rental schedules, review loan structures, apportion expenses, manage capital works schedules and lodge accurate returns.

Services include:

Review of rental statements.
Review of loan interest deductions.
Repairs vs improvements assessment.
Depreciation schedules support.
Year end rental tax planning.
Full bookkeeping for investors with multiple properties.
Guidance before renovations or upgrades.
Support with ATO reviews.

You receive clear advice and reliable information. You also receive support with cash flow, projections and planning across the year.

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👉 Trinity Accounting Practice

✅ Small Business Accounting Firm in Beverly Hills

☎️ 02 9543 6804

📍 159 Stoney Creek Road Beverly Hills NSW 2209

🌐 www.trinitygroup.com.au

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📅 Booking Link https://calendly.com/ramy-hanna

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