Tax on Rental Income in Australia: How It Works & What You Can Deduct (2026)

Rental income in Australia is taxed as ordinary income — it is added to your salary, wages, and other assessable income and taxed at your marginal rate. But the tax you actually pay (or save) on a rental property depends heavily on your deductions, and the range of deductible expenses available to Australian property investors is extensive.

This guide explains how rental income is taxed, every expense you can deduct, how depreciation works, how negative gearing reduces your total tax bill, and how to calculate your actual rental tax position for the 2025-26 financial year.

Use the Dolaro Rental Income Tax Calculator to calculate your exact tax saving or liability — it automatically derives your marginal rate from your salary so you don't have to guess your bracket.

Quick answer: Rental income is taxed at your marginal rate (16%, 30%, 37%, or 45% plus Medicare Levy in 2025-26). If your rental deductions exceed your rental income (negative gearing), the loss reduces your taxable income from other sources — saving tax at your marginal rate. A $15,000 rental loss at a 37% marginal rate saves $5,550 in tax annually.

How Rental Income Is Taxed in Australia

When you own a rental property, you must declare all rental income received during the financial year in your tax return. Rental income includes:

Weekly or monthly rent paid by tenants
Rental bond money you retain (if you keep it)
Insurance payouts for lost rent
Letting fees charged to tenants (where you receive these)
Payments for damage, cleaning, or repairs from tenants

Rental income is not a separate tax — it is added to your total assessable income (salary, wages, business income, other investment income) and taxed at your marginal rate under the standard personal income tax schedule.

2025-26 Marginal Tax Rates

Taxable income	Marginal tax rate	Effective rate on rental income
$0 – $18,200	0%	Nil
$18,201 – $45,000	16%	16% on each $ of rental income
$45,001 – $135,000	30%	30% on each $ of rental income
$135,001 – $190,000	37%	37% on each $ of rental income
Above $190,000	45%	45% on each $ of rental income

Plus 2% Medicare Levy on all taxable income above the low-income threshold.

Why marginal rate matters: If you earn $100,000 in salary, all your rental income (or all your rental losses) interact with the 30% marginal rate bracket. An extra $10,000 in rental income adds $3,000 in tax. A $10,000 rental loss saves $3,000 in tax.

If your salary is $150,000, your rental income interacts with the 37% bracket — the same $10,000 rental loss saves $3,700. Higher income earners get more tax relief from negative gearing because their marginal rate is higher.

What Can You Deduct on a Rental Property?

Australian tax law allows you to deduct all expenses incurred in earning rental income. The ATO divides deductible expenses into two categories: immediate deductions (claimed in the year the expense is incurred) and capital works deductions (depreciation claimed over time).

Immediately Deductible Expenses

These are deducted in full in the financial year they are incurred:

Loan interest The interest portion of your mortgage repayments is fully deductible. The principal portion is NOT deductible. If you have a $520,000 investment loan at 6.0%, the annual interest is $31,200 — all deductible. On a P&I loan, your interest decreases each year as the principal reduces — check your annual loan statement for the exact interest figure.

Property management fees Agency management fees (typically 7–10% of gross rent), letting fees (typically 1–2 weeks rent), lease renewal fees, and inspection fees — all deductible.

Council rates Annual council rates charged by the local council on the investment property — fully deductible.

Landlord insurance Building insurance for rental properties, landlord protection insurance — fully deductible. Contents insurance for landlord-owned furnishings is also deductible.

Repairs and maintenance Expenses to repair or maintain the property in its existing condition — deductible in full in the year incurred. This includes fixing a broken tap, repainting worn walls, repairing gutters, and replacing broken appliances with equivalent items.

Important distinction: repairs vs improvements. A repair restores the property to its prior condition. An improvement enhances it beyond its prior condition. Improvements are capital expenses — not immediately deductible, but depreciable over time. Installing a new kitchen where there was no kitchen is an improvement. Replacing a broken stove with a new equivalent stove is a repair.

Water rates and charges Where you as the landlord pay water rates — deductible. If the tenant pays water charges directly, those are not your expense.

Pest control Annual pest inspections and treatments — deductible.

Gardening and lawn mowing Where you pay for these — deductible.

Advertising and letting costs Advertising for tenants, photography costs for listings — deductible.

Strata/body corporate fees For apartments and units — administration fund levies are immediately deductible. Capital works fund levies are generally not immediately deductible but may be claimable via capital works depreciation (see below).

Accounting fees The portion of your accountant's fees attributable to managing your rental property tax affairs — deductible.

Travel expenses From 1 July 2017, travel expenses to inspect or manage a residential rental property are no longer deductible for most investors. This was removed by the Treasury Laws Amendment (Housing Tax Integrity) Act 2017. Exception: travel by a real estate agent or property manager (who is in the business of property management) remains deductible for them.

Non-Cash Deductions: Depreciation

Depreciation is the most powerful rental property deduction and the most frequently missed by investors. It allows you to claim a tax deduction for the wear and tear of the building structure and its fixtures and fittings — without any cash outgoing.

There are two types:

Division 43 — Building Allowance (Capital Works)

Division 43 allows you to claim 2.5% of the construction cost of the building each year for up to 40 years. This applies to the building structure — walls, floors, roof, fixed fittings.

Eligibility: construction must have commenced on or after 18 July 1985 for residential properties (16 September 1987 for commercial)
Rate: 2.5% per year of original construction cost (not your purchase price)
Claim period: up to 40 years from the original construction date
Source: a Quantity Surveyor (QS) depreciation report is required to substantiate the construction cost

Example: A property built in 2010 at a construction cost of $220,000 generates $5,500 per year in Div 43 deductions (2.5% × $220,000) — every year for 40 years from 2010, until 2050.

Division 40 — Plant and Equipment

Division 40 covers depreciable assets within the property — items with a finite useful life. Examples include:

Hot water systems
Air conditioning units
Dishwashers, ovens, rangehoods
Carpets and floating floors
Blinds and curtains
Smoke alarms
Garden sheds
Light fittings (in some cases)

Each asset is depreciated at its own rate (the ATO's Tax Ruling TR 2023/1 sets the effective lives of depreciable assets). A hot water system might have a 12-year effective life; carpet 10 years; air conditioning 10–15 years.

Important change from 1 July 2017: For residential investment properties, second-hand plant and equipment (items that were already in the property when you purchased it) can no longer be depreciated by subsequent owners. You can only depreciate plant and equipment that you purchased new — either as a new property or as new items you added to an existing property. New builds purchased after 9 May 2017 are not affected by this restriction.

Quantity Surveyor Report

To maximise depreciation deductions, almost all property investment advisers recommend commissioning a Quantity Surveyor (QS) depreciation report when purchasing an investment property. The report identifies all depreciable components, assigns values, and calculates annual deductions for both Div 43 and Div 40. Cost: typically $500–$800 for a residential property. A well-prepared report can identify $5,000–$15,000+ in annual depreciation deductions.

The ATO requires the QS report to be prepared by a qualified quantity surveyor. It is not sufficient to estimate depreciation yourself.

Negative Gearing: How the Tax Saving Works

Negative gearing occurs when your total rental deductions exceed your rental income — producing a net rental loss. This loss is offset against your other assessable income (salary, wages), reducing your total taxable income and therefore your tax bill.

Example:

Item	Amount
Annual rental income	$28,600
Loan interest	$36,400
Cash expenses	$8,200
Depreciation (Div 43 + Div 40)	$6,500
Total deductions	$51,100
Net rental loss	($22,500)

If your salary is $110,000 (30% marginal rate bracket):

Tax on salary alone: $110,000 → approximately $25,117
Tax on $110,000 − $22,500 = $87,500 → approximately $18,367
Annual tax saving from negative gearing: $6,750
Weekly equivalent: $6,750 ÷ 52 = $129.80/week

The $22,500 annual rental loss costs $22,500 in cash outgoings above rental income — but the ATO effectively subsidises $6,750 of that through the tax saving. The actual out-of-pocket cost is $22,500 − $6,750 = $15,750 per year or $303/week.

Use the Rental Income Tax Calculator to calculate your exact position — it derives your marginal rate automatically from your salary and shows the tax saving week by week.

Positive Gearing: When You Owe More Tax

If your rental income exceeds your deductions, you have positive gearing — a net rental profit. This profit is added to your assessable income and taxed at your marginal rate.

Positive gearing is increasingly common in regional areas where yields are 6–8% gross. The tax consequence: your rental profit creates additional tax liability.

Example:

Item	Amount
Annual rental income	$36,400
Total deductions	$24,000
Net rental profit	$12,400

At a 30% marginal rate, this adds $3,720 to your annual tax bill — or $71.50/week.

Positively geared properties generate taxable income each year but build equity through mortgage repayments and capital growth. The trade-off between cash flow and capital growth is a fundamental strategic choice in property investment.

PAYG Withholding Variation: Getting Your Tax Saving Now

If you are negatively geared, you normally wait until you lodge your annual tax return (July–October) to receive the tax saving as a refund. But you don't have to wait.

The ATO's PAYG Withholding Variation (Form 15-T) allows you to apply to have your employer reduce your tax withholding each pay period — effectively paying you the annual tax saving in advance, spread across each payslip throughout the year.

How it works:

You apply to the ATO with your estimated annual rental income, deductions, and projected loss
The ATO approves a reduced withholding rate for your employer
Your employer withholds less tax from each paycheck
At year end, the actual figures are reconciled in your tax return

Benefit: Instead of waiting for a lump sum refund, you receive $100–$200+ extra in each fortnightly paycheck throughout the year — improving cash flow significantly for negatively geared investors.

The Rental Income Tax Calculator shows the weekly PAYG variation benefit based on your inputs, so you can see exactly what applying would be worth.

How to apply: Download ATO Form 15-T from ato.gov.au. Lodge it before the start of the financial year (ideally July) or at any point during the year — the reduction takes effect from the next payroll cycle after approval.

The 2026 Budget Change: Negative Gearing on Established Properties

The May 2026 Federal Budget introduced a significant change to negative gearing rules for new purchasers of established residential properties.

From 1 July 2027, rental losses on established residential properties purchased after 12 May 2026 will be quarantined — they can only be offset against other rental income, not against salary or wages. This removes the ability to use negative gearing on established properties to reduce your income tax bill.

Key points:

Properties purchased before 12 May 2026: Existing negative gearing rules continue indefinitely
New builds: The quarantining rules do NOT apply — negative gearing remains available for new construction regardless of when purchased
Affected properties: Established residential dwellings purchased after 12 May 2026
Implementation date: The quarantining takes effect from 1 July 2027 (one year after Budget)
Quarantined losses: Can be carried forward and offset against future rental income (not lost permanently)

This is the most significant change to Australian property investment tax policy in decades. The Negative Gearing Calculator has been updated to reflect the post-Budget rules.

Worked Example: Full Rental Tax Calculation

Scenario: Sarah earns $120,000 in salary. She bought an established property in 2020 (before the Budget change, so negative gearing fully applies). Weekly rent: $620. Interest-only loan at 6.0% on $500,000 = $30,000/year interest.

Income	Amount
Annual rental income ($620 × 52)	$32,240
Deductions
Mortgage interest	$30,000
Property management (8.5%)	$2,740
Council rates	$1,800
Landlord insurance	$1,500
Repairs and maintenance	$1,200
Div 43 depreciation (2.5% × $180,000 construction cost)	$4,500
Div 40 plant & equipment	$2,800
Total deductions	$44,540
Net rental loss	($12,300)

Sarah's taxable income:

Salary: $120,000
Less rental loss: ($12,300)
Taxable income: $107,700

Tax on $120,000 (no property): approximately $28,517 Tax on $107,700 (with property): approximately $24,827

Annual tax saving: $3,690 (30% marginal rate × $12,300 loss) Weekly tax saving: $71 Weekly out-of-pocket cost after tax benefit: ($12,300 − $3,690) ÷ 52 = $166/week

Frequently Asked Questions

How is rental income taxed in Australia?

Rental income is added to your total assessable income (salary, wages, other income) and taxed at your marginal rate. In 2025-26, the marginal rates are 16% ($18,201–$45,000), 30% ($45,001–$135,000), 37% ($135,001–$190,000), and 45% (above $190,000), plus 2% Medicare Levy. If your deductions exceed your rental income (negative gearing), the net loss reduces your taxable income and produces a tax saving.

What can I claim as a tax deduction on a rental property in Australia?

You can deduct all expenses incurred in earning rental income, including: mortgage interest (interest component only), property management fees, council rates, landlord insurance, repairs and maintenance, water rates, pest control, advertising, strata fees, and accounting fees related to the property. You can also claim non-cash depreciation deductions for the building (Division 43, 2.5% per year) and plant and equipment (Division 40). Travel to inspect the property is no longer deductible for residential rental properties from 1 July 2017.

What is the difference between repairs and improvements for rental properties?

Repairs restore the property to its prior condition and are immediately deductible. Improvements enhance the property beyond its prior condition and are capital expenses — depreciable over time, not immediately deductible. Replacing a broken dishwasher with an equivalent model is a repair. Installing a dishwasher where there wasn't one before is an improvement.

What is Division 43 depreciation?

Division 43 (Building Allowance) allows you to claim 2.5% of the original construction cost of the building per year for up to 40 years. It applies to the building structure — walls, floors, roof, and fixed components. A quantity surveyor report is required to establish the construction cost. Residential buildings must have commenced construction on or after 18 July 1985 to be eligible.

What is Division 40 depreciation?

Division 40 (Plant and Equipment) covers depreciable assets within the property — items with a finite useful life such as hot water systems, air conditioning, carpets, appliances, and blinds. Each asset has an ATO-prescribed effective life and is depreciated at that rate. From 1 July 2017, second-hand plant and equipment in residential properties can no longer be depreciated by subsequent owners — only new items you purchase yourself are depreciable.

What is negative gearing and how does it save tax?

Negative gearing occurs when your rental deductions (including depreciation) exceed your rental income — producing a net rental loss. This loss is deducted from your total assessable income, reducing your taxable income and therefore your tax bill. The tax saving equals the rental loss multiplied by your marginal tax rate. A $15,000 rental loss at a 37% marginal rate saves $5,550 in tax annually ($106.73/week).

What is a PAYG Withholding Variation and how does it work?

A PAYG Withholding Variation (ATO Form 15-T) allows negatively geared investors to reduce the tax withheld from their salary each pay period — receiving the annual tax saving spread throughout the year rather than waiting for a tax refund. You apply to the ATO with your estimated rental figures, the ATO approves a reduced withholding rate, and your employer withholds less tax from each paycheck immediately.

How does the 2026 Budget change affect rental property tax?

From 1 July 2027, rental losses on established residential properties purchased after 12 May 2026 will be quarantined — they can only offset other rental income, not salary or wages. This removes the income tax offset from negative gearing on new purchases of established dwellings. Properties purchased before 12 May 2026 are unaffected. New builds remain fully eligible for negative gearing regardless of when purchased.

Do I need a quantity surveyor report for my rental property?

A quantity surveyor (QS) report is the standard method for establishing depreciation deductions under Division 43 and Division 40. While not legally mandatory for all properties, it is almost always necessary in practice — the ATO requires that depreciation claims be based on the actual construction cost, which a QS report establishes. Cost: $500–$800. Typical annual deductions identified: $5,000–$15,000+. The report cost itself is also tax deductible.

This article is general information only and does not constitute tax or financial advice. Rental property tax rules are complex and change regularly. Always confirm your tax position with a registered tax agent or accountant.