How Rental Income Is Taxed
How rental income is taxed in Australia — rent added to your taxable income, the expenses you can deduct, how depreciation works, and which records to keep.
Rental income isn't taxed separately or at some special landlord rate. It piles on top of everything else you earn — salary, side hustle, the lot — and gets taxed at your marginal rate, the rate on your top dollar of income.
The flip side is genuinely generous: a long list of expenses is deductible, meaning you subtract them from your income before your tax is worked out. And the best deduction of all — depreciation — doesn't cost you a cent in actual cash.
Rent stacks on top of your salary
Say you earn $85,000 and collect $25,000 in rent. Before deductions, your taxable income — the income the ATO actually taxes — is $110,000.
In FY2025-26, income between $45,001 and $135,000 is taxed at 30%, plus the 2% Medicare levy (the healthcare add-on). So every rent dollar in that range hands about 32 cents to the ATO — until your deductions claw it back.
And 'rental income' is broader than the weekly transfer. Insurance payouts for lost rent, bond money you keep (the tenant's security deposit), and reimbursements from tenants all count.
The deductions you claim right now
Most costs of earning the rent are deductible in the year you pay them. The big ones:
- Loan interest (just the interest — not the repayments that chip away at the loan itself)
- Property management and letting fees (what the agent charges to run the place and find tenants)
- Council rates, water charges and land tax (the yearly state tax on investment land)
- Landlord and building insurance
- Repairs and maintenance (fixing things, not improving them)
- Advertising for tenants, and accounting fees
Repair or improvement? The ATO cares. A lot.
Fixing a broken hot water system is a repair — claim it this year. Ripping out a dated-but-functional bathroom is a capital improvement — an upgrade, claimed slowly over years, not in one hit.
The test, roughly: are you putting something back to how it was, or making it better? Putting it back is a repair. Upgrading is capital.
Watch the timing trap too. Fixing damage that already existed when you bought the place is an 'initial repair' — treated as part of the purchase and not claimable now, no matter how repair-ish it feels.
⚠️The trap
Bought a fixer-upper and fixed it? Those first repairs generally can't be claimed straight away — the damage came with the purchase, so the ATO says you paid for it in the price.
Depreciation: the deduction with no receipt
Buildings and everything inside them slowly wear out, and the ATO lets you claim that wearing-out as a yearly expense. That's depreciation — a paper deduction that lowers your taxable income without any cash leaving your pocket.
It comes in two flavours. The building's structure — called capital works — is claimed at a small percentage per year, typically over decades. The stuff inside — called plant and equipment: appliances, carpets, blinds — each wears out on its own timeline. One catch: buy a second-hand home as a rental, and you can generally only claim the inside stuff on things you buy new yourself.
A quantity surveyor — a specialist who values buildings and everything in them — can map every claimable dollar in a depreciation schedule. It costs a few hundred dollars — deductible, naturally — and often pays for itself in the first year.
💡Quick win
One depreciation schedule, ordered once, unlocks deductions for decades. Skipping it is the most common way landlords quietly overpay tax year after year.
Paperwork: hoard now, relax later
The ATO loves double-checking landlords' returns (that's an audit), and proving every claim is your job. Keep loan statements, agent summaries, rate notices, insurance policies, every repair invoice, and your depreciation schedule.
The rule of thumb: at least five years after lodging each return. Keep purchase and improvement records even longer — as long as you own the property plus five years — because they feed your cost base (the running total of what the place cost you) for capital gains tax when you sell.
One folder per property per financial year (digital is fine) turns tax time into a half-hour job. And if your deductions outrun your rent, you've made a rental loss — which is exactly where negative gearing picks up the story.
FAQ
Do I pay tax on rent if the property makes a loss overall?
No. You declare the rent, claim the expenses, and only what's left over gets taxed. If expenses beat rent, the loss reduces your other taxable income — that's negative gearing.
Are my mortgage repayments deductible?
Only the interest slice. The rest of each repayment is just you paying off your own loan — building up your own share of the place isn't a cost of earning rent, so it's never deductible.
Do I need a depreciation schedule?
It's not compulsory, but it's usually a no-brainer. One report from a quantity surveyor (a building-valuation specialist) maps out years of deductions you'd otherwise miss — and the fee itself is deductible.
Run your own numbers
Sources: figures checked against ATO published rates and thresholds for FY2025-26 at the review date. See how we check our numbers.
⚠️ General information only — not tax or financial advice. Figures relate to FY2025-26 unless stated otherwise.