100% Deductible Expenses (Claim in the Current Year)
These expenses are fully deductible against your taxable income in the year they're incurred:
Mortgage interest (the biggest deduction):
- Interest-only loans: 100% of repayment is deductible
- P&I loans: Only the interest component is deductible
- On a $560K IO loan at 6.5%: $36,400/year deductible
Annual holding costs:
- Land tax: ~$2,000/year (varies by land value and ownership structure)
- Council rates: ~$2,000/year ($1,300–$3,298 depending on municipality)
- Water and service charges: ~$650/year
- Building and landlord insurance: ~$1,500–$2,900/year
Property management:
- Management fees: 4.90%–8.90% + GST of rent collected
- Letting fees: 1–2 weeks' rent when new tenant placed
- Marketing costs: REA listing $217 + GST, leased sign $163 + GST
Maintenance and repairs (case-by-case):
- Painting: Deductible if maintaining (not improving)
- Plumbing repairs: Deductible
- Pest treatment: Deductible
- Garden maintenance: Deductible
Safety compliance:
- Gas safety check: ~$250 (every 2 years)
- Electrical safety check: ~$250 (every 2 years)
- Smoke alarm inspection: ~$100 (annual)
NOT Deductible (Added to Cost Base for CGT)
These costs are not deductible in the current year but are added to your property's cost base, reducing Capital Gains Tax when you eventually sell:
Purchase costs:
- Stamp duty: ~5.5% of purchase price (~$37,000 on $700K)
- Buyer's agent fee: $15,800 + GST
- Conveyancing/legal fees
- Building and pest inspection: $450–$550
Loan costs:
- Principal repayments (only interest is deductible)
- LMI (Lenders Mortgage Insurance): $15,000–$18,000
- Loan application fees
Capital improvements (things that add value, not just maintain):
- New kitchen installation: $12,000–$15,000
- Granny flat construction: $110,000+
- Bathroom renovation: $15,000
- Structural repairs: $30,000+
Important distinction: Replacing a broken tap = maintenance (deductible). Upgrading all taps to designer fixtures = capital improvement (not immediately deductible, but depreciable over time).
Depreciation — The Non-Cash Tax Deduction
Depreciation lets you claim tax deductions for the "wearing out" of building and fixtures — without spending any actual money.
Building depreciation: 2.5% per year of construction cost
- A $110K granny flat generates ~$2,750/year in building depreciation
- At 37% marginal tax rate: ~$1,018/year tax benefit
- At 45% marginal tax rate: ~$1,238/year tax benefit
Fixture depreciation (Division 40):
- Carpet: 10-year effective life
- Hot water system: 12-year effective life
- Air conditioning: 10-year effective life
- Kitchen appliances: 12-year effective life
Depreciation schedule: Commission a quantity surveyor report ($600–$800) for your property. This identifies all depreciable items and creates a schedule that your accountant uses for tax returns. On a typical investment property, depreciation deductions can total $5,000–$15,000 per year.
How it works in practice:
- Property generates $28,600 annual rent
- Expenses (interest, rates, insurance): $42,550
- Cash loss: $13,950
- Depreciation (non-cash): $5,000
- Total tax loss: $18,950
- Tax refund at 45%: $8,528 (vs $6,278 without depreciation)