Can you deduct rental expenses when you have no rental income

You can claim a deduction in the income year you incur expenses for your rental property that relate to the management and maintenance of the property, including interest on loans.

If your property is negatively geared, you may be able to deduct the full amount of rental expenses against your rental and other income – such as salary and wages and business income.

On this page

• Expenses you claim this year
• Interest expenses
• Thin capitalisation
• Pre-paid expenses
• Repairs and maintenance
• Legal expenses

Expenses you claim this year

You can claim a deduction for these expenses only if you actually incur them and they are not paid by the tenant.

Expenses you may be entitled to claim an immediate deduction for in the income year you incur them include:

• advertising for tenants
• body corporate fees and charges
• council rates
• water charges
• land tax
• cleaning
• gardening and lawn mowing
• pest control
• insurance (building, contents, public liability, loss of rent)
• interest expenses
• pre-paid expenses
• property agent's fees and commission
• repairs and maintenance
• legal expenses.

For more information, see Rental properties guide.

Interest expenses

Charges on the principal amount of the loan that you take out for a rental property are known as interest expenses. The principal amount is the money you borrow from your bank or lender.

If you take out a loan to purchase a rental property, you can claim a deduction for the interest charged on the loan or a portion of the interest.

The property must be rented or genuinely available for rent in the income year you are claiming a deduction for the interest expenses.

For a summary of this information you can download or print, see Rental properties – interest expenses (PDF 247KB)This link will download a file.

What you can claim

You can claim the interest charges on the loan (mortgage) you use to:

• buy a rental property
• buy a depreciating asset for the rental property (for example, an air conditioner for the rental property)
• make repairs to the rental property (for example, roof repairs due to storm damage)
• finance renovations and extensions to the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property).

You can also claim interest expenses when:

• you have pre-paid interest expenses up to 12 months in advance
• you're repairing damage to your rental property, making it uninhabitable while the repairs are taking place.

Example: Claiming all interest incurred

Kosta and Jenny take out an investment loan for $350,000 to purchase an apartment they hold as joint tenants.

They rent out the property for the whole of the year from 1 July. They incur interest of $30,000 for the year.

Kosta and Jenny can each make an interest claim of $15,000 on their respective tax returns for the first year of the property.

End of example

What you can't claim

You can't claim a deduction for interest expenses you incur:

• for any period you used the property for private purposes, even if it's a short period of time
• on the portion of the loan you use for private purposes (for example, money you use to purchase a new family car), either when
  • you took out the loan
  • you refinance the loan
   
• on a loan you used to buy a new home if you don't use the new home to produce income, even if you use your rental property as security for the loan
• on any portion of the loan you use for private purposes, even if you are ahead in your repayments.

Example: Claiming part of the interest incurred

Yoko takes out a loan of $400,000. Yoko uses the loan to:

• buy a rental property for $380,000
• buy a new car for $20,000 for private use.

Yoko rents her property for the whole year from 1 July. Her total interest expense on the $400,000 loan is $35,000.

Yoko works out how much interest she can claim as a deduction, using the following calculation:

Total interest expenses × (rental property loan ÷ total borrowings) = deductible interest

$35,000 × ($380,000 ÷ $400,000) = $33,250

Yoko can claim an interest expense deduction of $33,250.

End of example

Loan accounts used for private and rental expenses

If you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals and is used for both private purposes and rental property expenses, you must keep accurate records to enable you to calculate the interest that applies to the rental property portion of the loan. You can't repay only the portion of the loan that relates to the personal purchase. Any repayments of the loan are apportioned across both purposes.

You must also separate the interest that relates to the rental property from any interest that relates to the private use of the fund.

For apportionment calculations in these situations, see paragraphs 19 and 20 of TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities.

Example: Interest incurred on a mortgage for a new home

Zac and Lucy take out a $400,000 loan secured against their existing home to purchase a new home.

Rather than sell their existing home, they decide to rent it out.

They have a mortgage of $25,000 remaining on their existing home which is added to the $400,000 loan under a loan facility with sub-accounts – that is, the two loans are managed separately but are secured by the one property.

Zac and Lucy can claim an interest deduction against the $25,000 loan for their original home, as it is now rented out.

They can't claim an interest deduction against the $400,000 loan used to purchase their new home as it's not being used to produce income even though the loan is secured against their rental property.

End of example

Example: Interest incurred on fund redrawn from the loan halfway through the year

Tyler has an investment loan for his rental property with a redraw facility. He is ahead on his repayments by $9,500 which he can redraw. Halfway through the year, Tyler redraws the available amount of $9,500 and buys himself a new TV and a lounge suite.

The outstanding balance of the loan after the redraw increases to $365,000 and total interest expense incurred immediately before the redraw is $9,300. The total interest on $365,000 for the year is $19,000.

Tyler can only claim the interest expense on the portion of the loan relating to the rental property using the following calculations:

Total loan balance − redraw amount = rental property loan portion

$365,000 − $9,500 = $355,500

To work out how much interest he can claim, he does the following calculation in respect of the period following the redraw:

Total interest expenses × (rental property loan portion ÷ loan balance at the time of the redraw) = deductible interest

$9,700 × ($355,500 ÷ $365,000) = $9,448

Tyler can claim interest of $18,748, being $9,300 plus $9,448.

End of example

Thin capitalisation

Thin capitalisation rules may affect you if the combined debt deductions (for example, interest) of you and your associated entities are more than $2 million in any financial year and you are:

• an Australian resident and you (or any associated entities) have  
  • certain international dealings
  • overseas interests
   
• a foreign resident (or associated entity) with certain investments in Australia.

You must consider the thin capitalisation rules each year.

Pre-paid expenses

A pre-paid expense is a cost you incur under an agreement for services to be done (in whole or in part) in a later income year. For example, payment of an insurance premium on 1 January that provides cover for the entire calendar year or interest on money you borrow.

You can generally claim an immediate deduction in the income year you make the prepayment in for:

• expenses of less than $1,000
• expenses of $1,000 or more where the service period is 12 months or less (such as payment of an annual insurance premium part way through an income year).

The service period is the period during which the thing is to be done under the agreement in return for the expenditure.

The eligible service period begins on the later of either:

• the day the thing under the agreement begins to be done
• on the day the expenditure is incurred.

A pre-paid expense that doesn't meet these criteria may have to be spread over two or more years.

You work out the part of your pre-paid expenses over the shorter of either:

• the eligible service period
• 10 years.

For more information, see Deductions for prepaid expenses.

Repairs and maintenance

Repair and maintenance expenses are those costs you incur to:

• keep your property in a tenantable condition
• fix wear and tear or damage that occurs as a result of renting out your property.

To be a deductible expense, the property must either:

• continue to be rented on an ongoing basis
• remain genuinely available for rent but there is a short period where the property is unoccupied – unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants.

For a summary of this information in poster format, see Rental properties repairs, maintenance and capital expenditure (PDF 235KB)This link will download a file.

You can claim repair and maintenance expenses in the income year you incur them.

However, you can't claim expenses as repairs and maintenance which are capital or of a capital nature. For example, replacement of an entire structure such as a fence or initial repairs such as defects that existed at the date you acquired the property.

For more detail on capital expenditure and improvements, see Rental expenses you claim over several years.

Watch: This video explains what you need to know before claiming a deduction for repairs and improvements to your property.

What you can claim immediately

Repairs

Repairs means working to make good or remedy defects in, damage to or deterioration of the property. Generally, repairs must relate directly to wear and tear or other damage that occurred as a result of renting out the property.

Examples of repairs include:

• replacing broken windows
• replacing part of the gutter damaged in a storm
• replacing part of a fence damaged by a falling tree branch
• repairing electrical appliances or machinery.

If you no longer rent the property, you may still be able to claim repair expenses where:

• the need for repairs relates to a period where the property was income producing
• the property was income producing during the income year you incur the expenses.

Maintenance

Maintenance means work to prevent deterioration or fix existing deterioration. Maintenance generally involves keeping your property in a tenantable condition.

Examples of maintenance include:

• repainting faded or damaged interior walls of a rental property
• oiling, brushing or cleaning something that is otherwise in good working condition – for example, oiling a deck or cleaning a swimming pool
• maintaining plumbing.

What you can claim over several years

Repairs and maintenance unrelated to wear and tear or damage

You can't claim the total costs of repairs and maintenance in the year you paid them if they did not relate directly to wear and tear or other damage occurring due to renting out your property. These are capital expenses you may be able to claim over a number of years as capital works deductions or deductions for decline in value.

For more information, see Rental expenses you claim over several years.

Improvements

You can't claim a deduction for the total cost of improvements to your rental property in the year you incur them.

An improvement is anything that makes an aspect of the property better, more valuable, more desirable or changes the character of the item on which works are being carried out.

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

Improvement means work that:

• provides something new
• generally 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 cannot claim the cost of the new wall as a repair, but he can claim it as capital works deductions.

However, had 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 merely restored the efficient function of the wall without changing its character, even though a different material was used.

End of example

Repairs vs improvements

If you conduct a project that includes both repairs and improvements to your property, you can only claim an income tax deduction for the cost of your repairs if you can separate the cost of the repairs from the cost of the improvements.

If you hire a builder or other professionals to carry out these works for you, we recommend you ask for an itemised invoice to help work out your claim.

Example: Apportioning expenses between repairs and improvements

Caitlin has modernised her rental property by hiring tradespeople to render and paint the external walls. She also asked the painter to paint the internal walls, which had deteriorated during the time she rented out the property.

As Caitlin requested an itemised invoice from the painter, she could separate the cost of the internal and external painting, and rendering. Due to this, she could claim an income tax deduction for the cost of painting the internal walls as a repair. She could claim the costs for the external walls as capital works deductions.

End of example

It is important to correctly categorise each expense you incur to ensure it is treated correctly for tax purposes. Our quick reference guide in the table below will help you to determine which category your expense relates to.

For more information, see Rental expenses you claim over several years.

Legal expenses

Rental property legal expenses are those costs you incur to prepare, register, protect and manage your rental property.

You can claim a deduction for some of the legal expenses you incur to produce your rental income. You can claim these expenses in the income year you incur them.

What you can claim

You can claim the cost of the following as income tax deductions:

• evicting a non-paying tenant
• expenses incurred in taking court action for loss of rental income
• defending a damages claim regarding injuries suffered by a third party on your rental property.

What you can't claim

Most legal expenses you incur for a rental property or holiday home are of a capital nature. You can't claim the cost of the following as income tax deductions:

• solicitor's fees for the purchase of the property (these are a capital expense)
• solicitor's fees for the preparation of loan documents (these can be claimed as borrowing expenses)
• legal costs associated with resisting land resumption (these are a capital expense)
• legal costs associated with defending your title to the property (for example, defending an action by the mortgagee to take possession of the property where you have defaulted under the loan – these are a capital expense).

Legal expenses which are capital in nature may form part of the cost base of your property for capital gains tax (CGT) purposes when you sell the property.

For more information about how tax applies to rental properties, refer to:

• Rental properties guide
• Guide to capital gains tax
• Guide to depreciating assets
• CGT when selling your rental property

You can claim a deduction in the income year you incur rental expenses that relate to the management and maintenance of the property.

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