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Rental expenses you claim over several years

You can generally claim a deduction over several years for borrowing expenses, asset decline in value and capital works.

16 June 2024

Borrowing expenses

Borrowing expenses are the expenses you incur to take out a loan to buy property.

You must claim a deduction for all eligible borrowing expenses for 5 years or spread it over the term of the loan, whichever is shorter.

If the total deductible borrowing expenses are $100 or less, they are fully deductible in the income year you incur them.

If you have refinanced or redrawn on your loan, see Interest expenses.

For a summary of this information in poster format see, Rental properties – borrowing expenses (PDF, 218KB).

For more information on borrowing expenses you can't claim see, Rental expenses you can't claim.

Borrowing expenses you can claim

You can claim a deduction for the following as borrowing expenses:

  • loan establishment fees
  • lender's mortgage insurance (insurance taken out by the lender and billed to you)
  • title search fees charged by your lender
  • costs for preparing and filing mortgage documents (including solicitors' fees)
  • mortgage broker fees
  • fees for a valuation required for loan approval
  • stamp duty charged on the mortgage.

How to work out borrowing expenses

Generally, borrowing expenses are claimed over the first 5 years of owning your rental property.

If you got the loan part way through the income year, you need to adjust your claim according to the number of days in the year you had the loan.

You can claim a deduction for the balance of the borrowing expenses in the final year of repayment if you either:

  • repay sooner than the term of the loan
  • repay your loan in less than 5 years.
Example: work out borrowing expenses for the maximum 5-year period

The Hitchman's pay a total of $1,670 in establishment fees, valuation fees and stamp duty to secure a 20-year loan of $209,000 to buy:

  • a rental property for $170,000
  • a motor vehicle for personal use for $39,000.

As the Hitchmans' borrowing expenses are more than $100, they must be apportioned over 5 years because that is less than the period of the loan (20 years).

As the loan was used for both income-producing ($170,000) and non-income producing purposes ($39,000), only the income-producing portion of the borrowing expenses is deductible.

They obtained the loan on 17 July 2023. They work out their deductions for the borrowing expenses for the first year as follows:

Borrowing expenses × (number of relevant days in year ÷ number of days in the 5-year period) × (amount of rental property loan ÷ total amount borrowed) = deduction for the year.

Their borrowing expense deductions for the subsequent years would be worked out as shown in the table below.

Borrowing expense calculation

Year

Calculation

Available deduction for the year

1 (leap year)

$1,670.00 × (350 ÷ 1,826) = $320.10
$320.10 × ($170,000 ÷ $209,000)

$260.37

2

$1,349.90 × (365 ÷ 1,476) = $333.82
$333.82 × ($170,000 ÷ $209,000)

$271.53

3

$1,016.08 × (365 ÷ 1,111) = $333.82
$333.82 × ($170,000 ÷ $209,000)

$271.53

4

$682.26 × (365 ÷ 746) = $333.81
$333.81 × ($170,000 ÷ $209,000)

$271.53

5

$348.45 × (365 ÷ 381) = 333.82
$333.82 × ($170,000 ÷ $209,000)

$271.53

6

$14.63 × (16 ÷ 16) = $14.63
$14.63 × ($170,000 ÷ $209,000)

$11.90

 

End of example

Tax-smart tips for your investment property has more information on investing in property.

Capital expenses

Some capital expenses for your rental property can be claimed over a number of years. This includes:

In some circumstances, initial repairs can also be claimed over a number of years as either capital works or capital allowances.

For a summary, you can download our fact sheet on Rental properties – Repairs, maintenance and capital expenditure (PDF, 231KB).

For more detail on repairs and maintenance expenses, see Repairs and maintenance.

Capital works

Capital works includes expenses for building the property as well as structural improvements, alterations and extensions to the property. The rate of deduction for these capital works is generally 2.5% or 4% per year, spread over a period of 40 or 25 years respectively.

You can only claim a deduction for the capital works on rental properties if the property:

  • was built after 17 July 1985
  • is rented or genuinely available for rent.

An asset that is fixed to, or otherwise part of, a building or structural improvement, will generally be a construction expense and can only be claimed as capital works.

Preliminary expenses such as architect fees, engineering fees, surveying fees, foundation excavation expenses and costs of building permits also form part of construction expenses.

Examples of capital works expenses include:

  • building and construction costs
  • alterations to a building
  • major renovations to a room
  • substantial renovations to a property
  • adding a fence
  • building extensions such as garages and patios
  • adding structural improvements such as a driveway or retaining wall.

You must wait until construction is complete to claim a deduction. Capital works deductions can't exceed your construction expenses.

Example: replacing assets in a residential property

Janet has owned and rented out a residential property since 12 January 1983. In 2023, she replaced the old kitchen fixtures, including the cupboards and appliances. The old cupboards had deteriorated through water damage and wear and tear.

The kitchen cupboards are separately identifiable capital items with their own function. This means the cost of completely replacing them is a capital cost. Because of this, Janet can claim:

  • capital works deductions for the construction cost of this work
  • deductions for the decline in value of the new kitchen appliances (none of these appliances were previously used).

This is the case regardless of whether:

  • new fittings are of a similar size, design and quality as the originals
  • new cupboards are made from a modern equivalent of the material used in the originals
  • layout and design of the new kitchen may be substantially the same as the original.
End of example

Initial repairs

Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property can't be claimed as an immediate deduction. It doesn’t matter if you were unaware of the need to make repairs to the property at the time you purchased it.

Depending on the type of expense you incur, it may be either:

  • capital works, for example if you replace assets such as a complete fence or building
  • capital allowances, for example if you replace depreciating assets such as installing a new dishwasher or new carpets. You may be able to claim its decline in value.

The cost of remedying initial repairs that existed at the time of purchase form part of the CGT cost base when you sell the property. You must reduce the CGT cost base by amounts claimed (or that you were entitled to claim) as capital works for the initial repairs.

Example: initial repairs not deductible (existing damage)

Lisa buys a property with the intention of renting it out. At the time of purchase Lisa knew that she would need to repair the roof (replace all roof tiles) and part of the ceiling as they were in a poor condition.

When carrying out the works, Lisa discovered there was extra structural damage that required her immediate attention. The repair to the ceiling cost her $2,000, the replacement of roof tiles cost her $9,000 and the structural work cost her a total of $15,000.

The 'initial' repair of the ceiling of $2,000 isn't deductible, but as with the replacement of the entire roof and the structural work, they can be claimed as capital works expenses.

When the property is sold, Lisa can include the $26,000 for the work to rectify the existing damage in her CGT cost base. Lisa will also need to reduce that amount by the capital works deduction she has already claimed.

End of example

To find out about the expenses you can claim now for a rental property, see Rental expenses you can claim now.

For more information about how capital gains tax (CGT) applies to rental properties, see our Guide to capital gains tax.

Improvements

An improvement is anything that makes part of the property better, more valuable, more desirable or changes the character of the item that is being worked on.

Capital improvements (such as remodelling a bathroom or adding a pergola) should be claimed as capital works deductions.

Improvements include work that:

  • provides something new
  • furthers the income-producing ability or expected life of the property
  • goes beyond just restoring the efficient functioning of the property.

Improvements can be either capital works where it is a structural improvement or capital allowances where the item is a depreciating asset.

Example: property improvements

Tim replaced a fibre cement sheeting wall inside his property because it was damaged by tenants. He replaced the old wall with a brick feature wall.

The new wall is an improvement because Tim did more than just restore the efficient function of the wall. This means Tim can't claim the cost of the new wall as a repair, but he can claim it as capital works deductions.

If Tim replaced the fibro with a current equivalent, such as plasterboard, he could have claimed his costs as a repair. This is because it would have restored the efficient function of the wall without changing its character, even though a different material was used.

End of example

Substantial renovations

Substantial renovations of a rental property are where all or substantially all, of a building is removed or is replaced. This could include the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

For renovations to be substantial, they must directly affect most rooms in a building.

Renovations you make to a house are considered collectively, such as the:

  • removal and replacement of the exterior walls
  • removal of some internal walls
  • replacement of the flooring
  • replacement of the kitchen.

If the renovations are substantial, the property is treated as new residential premises.

Apart from the cost of replacing depreciating assets, the cost of all renovations are deductible as capital works.

The cost of replacing depreciating assets as part of substantial renovations, can be claimed as a decline in value deduction, provided the asset has been acquired as a new asset for the purpose of gaining income from rental income.

Example: claiming the cost of renovations

Jake bought a 4 bedroom residential property in October 2023 with the intent of it being a rental property. Three months before selling, the previous owners removed a wall between 2 bedrooms and turned the space into a large bedroom with an ensuite. They also repainted and recarpeted the room.

Even though Jake acquired the property within 6 months of the renovations being completed, the renovations only affected a part of the house, and aren't classified as being substantial renovations.

The previous owners provide Jake with the renovation construction costs.

The cost of the renovations, excluding the new carpet and any other depreciating assets replaced, can be claimed as a capital works deduction by Jake.

As the new carpet and other depreciating assets are not acquired as new assets by Jake, he can't claim a deduction for their decline in value.

However, if Jake buys any brand new depreciating assets for the property, he will be able to claim a deduction for their decline in value.

End of example

Capital allowances

Under the uniform capital allowance rules, you can claim a deduction for the decline in value of depreciating assets used for income-producing purposes, for example a dishwasher in rental property which is rented or genuinely available for rent.

Depreciating assets

Depreciating assets are items that can be described as plant, that don't form part of rental property premises. Premises refers to the actual structure of the rental property's building.

Some assets don't decline in value, such as land, trading stock and some intangible assets (for example, goodwill).

We recommend you keep a spreadsheet (as a minimum) for your depreciating assets as part of your record keeping. A quantity surveyor can prepare a report at the time a rental property is purchased.

Depreciating assets are usually:

  • separately identifiable
  • unlikely to be permanent
  • replaced within a relatively short period
  • not part of the structure of the building.

None of these factors alone can determine if an item is part of the premises. They must all be considered together.

You can claim a deduction for the item's decline in value. You can choose to use either:

  • the effective life the Commissioner determines for these assets
  • your own reasonable estimate of the effective life.

You must keep records to show how you work out the decline in value.

How you deal with depreciating assets:

Decline in value of depreciating assets

Depreciating assets have an effective useful life and are reasonably expected to decline in value over time.

For depreciating assets costing more than $300, you can claim deductions for the decline in value over its effective useful life. Examples of such assets in your rental property or holiday home include:

  • floating timber flooring
  • carpets
  • curtains
  • appliances like a washing machine or fridge
  • furniture.

When you purchase a rental property, either new or second-hand, you have bought a building plus separate depreciating assets, such as air conditioners, stoves and other items.

There are limitations that apply to decline in value of second-hand depreciating assets.

The decline in value of a depreciating asset starts when you first use it or install it ready for use – it doesn't matter whether it is for a private purpose or to earn assessable income. For example, if you purchased and installed a new asset on 1 January and used it for private purposes for the first 2 weeks, you calculate the decline in value from that date. However your deduction must be reduced for any private use of the asset.

Special rules apply to some assets that may allow you to claim deductions for their decline in value (depreciation) more quickly.

Watch: This video explains depreciating assets and when you can claim them as a deduction for a rental property.

Media: Claiming depreciating assets
Claiming depreciating assets (ato.gov.au)External Link (Duration: 02:21)

Depreciating assets costing $300 or less

Assets costing $300 or less can be claimed as an immediate deduction (a full deduction) in the income year you used the asset for a taxable purpose.

You can't claim an immediate deduction if the asset is part of a set of assets that together cost more than $300. For example, if you buy 4 dining chairs each costing $250 for your rental property you can't treat them as separate assets.

New assets

You can claim the decline in value of new depreciating assets.

This includes depreciating assets purchased with a newly built or substantially renovated property, if no one was previously entitled to a deduction for the decline in value, and either:

  • no one resided at the property before you acquired it
  • the asset was installed for use, or used at this property, and you acquired the property within 6 months of it being newly built or substantially renovated.
Example: claiming the decline in value of depreciating assets

Kerrie purchased a unit off-the-plan from a developer as an investment (it was new and no one lived in it prior to that time).

The property included depreciating assets such as curtains and furniture installed before settlement and the transfer of title to Kerrie.

Kerrie engages a qualified quantity surveyor to get a full list of all depreciating assets that she can claim each year until the end of their effective lives.

Kerrie is entitled to claim deductions for decline in value of the depreciating assets because no one has lived in it before she purchased it.

End of example
Example: claiming the decline in value of depreciating assets

Kate purchased a residential investment apartment from a developer 4 months after completion. It was already tenanted when Kate purchased it. The developer wasn’t entitled to claim a deduction for the decline in value of the depreciating assets at the property because they were his trading stock.

The property included depreciating assets such as curtains and furniture installed before settlement and the transfer of title to Kate.

Kate engages a qualified quantity surveyor to get a full list of all depreciating assets that she can claim each year until the end of their effective lives.

Kate is entitled to claim a deduction for decline in value of the depreciating assets (although they have been used by the tenants) because both of the following apply:

  • no one could claim any deductions for decline in value of the depreciating assets
  • the property was supplied to Kate within 6 months of being built.

If Kate had entered into the contract to buy this apartment after 6 months of it being newly built, she wouldn’t have been entitled to claim a deduction for the decline in value of any of the depreciating assets that were already in it at that time.

End of example

Second-hand depreciating assets decline in value deduction limit

Second-hand depreciating assets are depreciating assets that were already installed ready for use or used:

  • by another entity (except as trading stock)
  • in your private residence
  • for a non-taxable purpose, unless that use was occasional (for example, staying at the property for one evening while carrying out maintenance activities would be occasional use).

You can’t claim a deduction for certain second-hand depreciating assets unless you are either:

  • using the property in carrying on a business (including a business of letting rental properties)
  • one of the following
    • corporate tax entity
    • superannuation plan that is not a self-managed super fund
    • public unit trust
    • managed investment trust
    • unit trust or a partnership, where all of the members are entities of a type listed above.

Otherwise, you can only claim deductions for second-hand or used depreciating assets in residential rental properties if both of the following apply:

  • you purchased the asset before 7:30 pm on 9 May 2017
  • you installed it into your rental property before 1 July 2017.
Example: claiming the decline in value of second-hand assets

Sharon has been renting out her residential property since September 2015. In March 2017, she purchased a second-hand fridge to replace the fridge that had broken down.

Because Sharon purchased the second-hand fridge for her rental property before 7:30 pm on 9 May 2017, she can claim a deduction for the decline in value for any remaining effective life of the asset.

End of example
Example: Tim's rental property

Sue purchased her house in 2009. In October 2023, she listed her house for sale. While it was advertised, she moved out and replaced the carpet. No one lived in the house while it was advertised. The house was then sold to Tim. After purchasing the property, Tim rented it out immediately.

Tim can't claim a deduction for the decline in value of the depreciating assets in the property because they were all previously used. He also can't claim a deduction for the decline in value for the carpet because he didn't own the asset when it was first installed ready for use.

End of example
Example: deductions for the decline in value over the effective life of a second-hand depreciating asset

Don purchased a second-hand clothes dryer and installed it in his residential rental property on 8 May 2017.

Assuming the dryer had 5 years of remaining effective life, Don can claim deductions for its decline in value for 5 years because he had purchased and installed the dryer before 9 May 2017.

End of example
Example: deductions for decline in value – asset used privately

Eliza purchased a dishwasher in April 2017 and used it for private purposes at home (her main residence). In July 2019, she installed this dishwasher in her residential rental property. Eliza can't claim deductions for the dishwasher's decline in value because:

  • she had previously used it privately, and
  • she installed it in her rental property after 30 June 2017.
End of example
Home turned into a rental property before 1 July 2017

If you turned your home into a residential rental property, you can only claim a deduction for the decline in value of assets in it if both of the following apply:

  • You purchased your home before 7:30 pm on 9 May 2017.
  • You turned your home into a residential rental property before 1 July 2017.
Example: deductions for decline in value over the effective life – assets bought after 9 May 2017

At the start of 2016, Marty purchased a home as his main residence.

In June 2017, Marty moved out and rented out the property fully furnished, which included the furniture and fittings he had been using while living there.

As Marty rented out his home before 1 July 2017, and he purchased it before 7:30 pm on 9 May 2017, he can claim a deduction for the decline in value for any remaining effective life of the used depreciating assets in it.

However, from the 2017–18 income year, Marty can’t claim a deduction for the decline in value of any second-hand depreciating asset that he purchases and installs after 7:30 pm on 9 May 2017.

If Marty:

  • Moved out in June 2017 and the property was vacant until he made it available for rent in July 2017, he couldn’t claim a deduction for the decline in value for any remaining effective life of the used depreciating assets in it.
  • Purchased a new asset for the rental property after he moved out, he can claim a deduction for its decline in value, as the asset wasn’t previously used.
End of example

For more information on depreciation, including a list of rental property items that can be depreciated, see the Rental properties guide or the Guide to depreciating assets.

Carrying on a business of letting rental properties

Your income from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business, as such activities are generally considered a form of investment rather than a business.

Whether a business is carried on must be answered by considering a number of factors. No one factor is decisive. All of the factors must be considered as a whole. Some of the factors considered in determining whether you carry on a business of letting rental properties are:

  • the total number of residential properties that are rented out
  • the average number of hours per week you spend actively engaged in managing the rental properties
  • the skill and expertise exercised in undertaking these activities
  • whether professional records are kept and maintained in a businesslike manner.
Example: not carrying on a business of property investing

Saania owns 16 rental properties, 14 of which are managed by real estate agents. Saania frequently attends personally to rental property matters, such as collecting rent and arranging for repairs to be done. She also undertakes regular analysis to measure the financial performance of her rental properties.

Saania is not carrying on a business of property investing because the activities are no more than letting properties.

End of example
Example: carrying on a rental property business

Mr and Mrs Smith own a number of rental properties either as joint tenants or equal tenants in common. They own 8 houses and 3 apartment blocks. Each block comprises 6 residential units. So, they own a total of 26 rental properties. The Smiths actively manage all of the properties. They devote a significant amount of time to these activities – an average of 25 hours per week each. They undertake all financial planning and decision-making in relation to the properties. They interview all prospective tenants and conduct all of the rent collections. They carry out regular property inspections and attend to all of the everyday maintenance and repairs themselves or organise for them to be done.

The Smiths are carrying on a rental property business. This is indicated by the following factors:

  • the significant size and scale of the rental property activities
  • the number of hours they spend on the activities
  • their extensive personal involvement in the activities
  • the business-like manner in which the activities are planned, organised and carried on.
End of example

Calculating deductions for decline in value

To work out your deduction for decline in value, use either the:

  • diminishing value method – the decline in value each year is a constant portion of the remaining value – claiming higher deductions in the early years of its effective life
  • prime cost method – the decline in value each year is a uniform amount of the original value over its effective life – claiming a lower but more constant portion each year.

Depreciating assets valued at less than $1,000 can be grouped in a low-value asset pool and depreciated together.

Example: calculating deductions for decline in value

Laura purchased a new outdoor table for her rental property on 1 July 2022, for $1,500. It has an effective life of 5 years. She can choose to use either the diminishing value or prime cost method.

Diminishing value method

The formula for the annual decline in value using the diminishing value method is:

Asset's cost × (days held ÷ 365) × (200% ÷ asset's effective life)

The decline in value for 2022–23 is $600, worked out as follows:

1,500 × (365 ÷ 365) × (200% ÷ 5)

Laura is entitled to a deduction for decline in value of $600.

The adjustable value of the asset on 30 June 2023 is $900. This is the cost of the asset ($1,500) less its decline in value up to 30 June 2023 ($600).

Prime cost method

The formula for the annual decline in value using the prime cost method is:

Asset's cost × (days held ÷ 365) × (100% ÷ asset's effective life)

The decline in value for 2022–23 is $300, worked out as follows:

$1,500 × (365 ÷ 365) × (100% ÷ 5)

Laura is entitled to a deduction for decline in value of $300.

The adjustable value of the asset on 30 June 2023 is $1,200. This is the cost of the asset ($1,500) less its decline in value up to 30 June 2023 ($300).

End of example

For help to help work out the deduction you can claim from a depreciating asset, see Depreciation and capital allowances tool.



Work out your capital works deductions

You can claim capital works deductions for certain construction costs for your rental property.

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