Investment Property Tax Deductions: 2025-26 Lodgement Guide

David is 51, a teacher in Brisbane with a negatively geared unit in Ipswich. This winter he replaced the unit's corroded hot-water system and renovated a tired bathroom, and now — lodging his 2025–26 return — he faces the question that decides hundreds of dollars: which of those is a deductible repair, and which is a capital improvement claimable at 2.5% a year for 40 years? This guide covers his answer and every other deduction on the rental schedule, plus the law change every investor now needs to plan around.

Deductible in Full on This Return

For any period the property was rented or genuinely available for rent, these come straight off your rental income:

• Loan interest — on the portion of the loan that funded the rental property. If you've redrawn on the loan for private spending (a car, a holiday), that slice of the interest is never deductible and the split follows the loan for its life.
• Holding costs — council rates, water charges, land tax, landlord insurance.
• Agent and management fees — ongoing commission, letting fees, lease preparation.
• Body corporate levies — with one distinction that catches unit owners: administration fund and general-purpose sinking fund levies are immediately deductible; special-purpose levies raised for a specific capital project (say, replacing the building's roof) are not — they're capital works, claimable at 2.5% a year.
• Genuine repairs and maintenance — plus pest control, cleaning between tenants, advertising for tenants, and your accountant's fee for the rental schedule.

Repairs vs Improvements: David's Bathroom

The ATO's test (ruling TR 97/23) is restoration versus betterment. A repair puts something back the way it was, with broadly similar materials — David's replacement hot-water system, fixing a leaking tap, patching a section of damaged fence: deductible this return. An improvement makes it better, bigger or different — David's bathroom renovation with new fixtures, retiling and a better layout is capital works: 2.5% a year over 40 years, not an immediate deduction.

Two traps inside this rule. First, initial repairs: fixing damage or deterioration that existed when you bought the property is never an immediate deduction — even if you only discovered it after settlement. It's treated as capital (and joins the cost base or capital works). Second, wholesale replacement: repairing part of a structure is a repair; replacing the entire thing — a whole new fence, a full roof in upgraded materials — tips into capital territory even when the old one was worn out.

Depreciation: The Deduction Most Investors Under-Claim

Two separate systems. Division 43 (capital works): 2.5% a year of the original construction cost, for 40 years, on buildings where construction started after 15 September 1987 — structure, roofing, tiling, built-in cabinetry. It survives changes of ownership, so a 2005-built unit still has years of claims left. Division 40 (plant and equipment): ovens, carpets, blinds, air conditioners, hot-water systems — depreciated over each asset's effective life, but with the 2017 restriction: for contracts signed after 7:30pm AEST on 9 May 2017, plant and equipment that came second-hand with the property cannot be depreciated. Only items that were brand new at purchase, or that you buy and install yourself, qualify. (David's new hot-water system: if it were treated as a replacement asset rather than a repair, it would be his new asset and depreciable — one reason the repair/capital line matters twice.)

The practical move: a quantity surveyor's depreciation schedule — typically $385–$770 for a residential property, itself deductible — documents both divisions for the life of the property. On most post-1987 builds it pays for itself in the first year. Don't forget borrowing expenses either: loan establishment fees, lenders mortgage insurance and title fees over $100 total are claimed over five years (or the loan term if shorter); $100 or less, immediately.

Never Deductible — Don't Let Software Tempt You

• Purchase stamp duty and conveyancing — CGT cost base, not a deduction (they reduce your gain at sale).
• Travel to inspect the property — banned for residential landlords since 1 July 2017, including transport, meals and accommodation. Still one of the ATO's most-flagged incorrect claims.
• Loan principal — only the interest component is deductible.
• Initial repairs and second-hand plant & equipment — per the sections above.

The Law Has Now Changed — What Applies From 1 July 2027

If the law change has you weighing an exit, start with the number that actually matters: see how selling costs, stamp duty and loan interest combine in the full exit ledger — the calculator returns your net walk-away figure for any sale year, with the CGT estimate for investors built in.

Cash Flow Now, Not Next July: The PAYG Variation

If your property runs at a loss, you don't have to wait for a refund at lodgement. A PAYG withholding variation (ATO form NAT 2036) lets the ATO direct your employer to withhold less tax each pay, spreading the negative-gearing benefit across the year. Apply through myGov or a registered tax agent — processing typically takes up to 28 days, and it needs renewing each financial year.