Understanding rental property income & expenses

Rental properties can offer significant financial benefits, but navigating the tax implications requires a clear understanding of income, expenses and depreciation.

The ATO requires you to declare all income you receive, or are entitled to receive, when renting out any part of your property. This applies to traditional leases, subleases, Air BnB rentals, and holiday lets. It encompasses not just the base rent, but also associated payments like booking fees and even reimbursements for repairs you claimed deductions for.

Keeping detailed records of all rental income is crucial, especially if you personally use the property as well. In these scenarios, deductions will need to be apportioned based on your personal usage compared to rental usage.

As your property ages, the building itself and the assets within it naturally wear out, i.e. they depreciate. The ATO allows residential rental property owners to claim this depreciation as a tax deduction, effectively reducing your taxable income. There are two main categories for claiming depreciation:

Capital Works: This applies to the structure of the rental property and any permanent fixtures like roofs, walls, doors, and kitchen cupboards. Properties built after 15 September 1987, qualify for capital works deductions at a rate of 2.5% per year for 40 years. Renovations on older properties might also qualify.
Plant and Equipment Assets: These are removable fixtures and fittings within the property, such as carpets, blinds, air conditioners, hot water systems and smoke alarms. Depreciation deductions are based on their estimated useful life set by the ATO.

Depreciation schedules are prepared by quantity surveyors – we recommend BMT to our clients. The cost of this depreciation report is deductible against the rental income.

Owning a rental property comes with various ongoing expenses, some of which you can claim deductions to offset your tax liability. You can only claim deductions for expenses incurred while the property is genuinely available for rent.

Here’s a breakdown of some common deductible expenses:

Advertising for tenants
Body corporate fees and charges
Local council rates and land tax
Electricity and gas
Insurance for building, contents, public liability and loss of rent
Interest on loans
Property agent’s fees and commissions
Repairs and maintenance

For a complete list of deductible expenses, please refer to our checklist here.

For co-owners of a rental property, all income and expenses must be divided in line with their legal interest in the property. If they own the property as:

Joint tenants, each hold an equal interest in the property.
Tenants in common, they may hold unequal interests in the property – for example, one may hold a 20% interest and the other an 80% interest.

To ensure a smooth tax filing process and claim everything you’re entitled to, don’t forget to keep detailed and organised records of all your rental income and expenses for easy reference come tax time.

Some examples of records you should keep making it easier to complete your return:

Rental statements from property agents – this will include the rental income, property agent fees and commissions, and advertising expenses
Loan documents
Receipts for expenses, including repairs, maintenance, insurance and purchases of depreciating assets
Land tax assessments
Credit card records
Tenant leases
Bank statements
Details of leasing costs – including preparation, registration, and stamp duty
A record of the number of weeks the property was rented and the date the property first earned rental income