Quick answer: You pay tax on your rental profit, not your rent. The ATO takes your gross rental income, subtracts every deductible expense, and adds the net figure to your other income — your salary, for example — where it’s taxed at your marginal rate. In 2026-27, a landlord on a $68,000 salary with $30,000 of rent and $25,150 of deductions adds $4,850 to their taxable income and pays an extra $1,552 (income tax plus the 2% Medicare levy). This guide covers exactly what counts as rental income (yes, Airbnb too), every deduction the ATO allows, the repairs-versus-improvements line that trips up most landlords, and the mistakes that cost real money.
Running at a loss instead of a profit? That’s negative gearing — our negative gearing guide has the full 2026-27 maths on offsetting losses against your salary, plus the 1 July 2027 reform. This article covers the other side of the ledger: what you declare and what you claim.
What counts as rental income
The ATO’s rule is simple: rental income is the full amount you earn when you rent out the property — gross, before your agent takes their cut. You report the rent your tenant paid, not what landed in your bank account after management fees. Beyond the obvious weekly rent, the ATO counts all of this as income:
- Bond money you keep — retained in place of unpaid rent, or kept because of damage needing repairs. A bond you refund in full is never income.
- Insurance payouts for lost rent, and reimbursements for rental expenses you already claimed.
- Cancelled-booking fees you retain on short-stay listings.
- Payments in goods or services — a tenant who does the gardening in lieu of part of the rent is still paying you; declare the monetary value.
- Everything from the sharing economy — Airbnb, Stayz, a spare room on a booking app. Even if you rented it out for two weeks, even if you think of it as your holiday house. The ATO receives data directly from the platforms, so undeclared short-stay income is increasingly easy to spot.
If you co-own the property, declare only your share of the income (and claim only your share of the expenses). And there’s no GST on residential rent — that’s one less thing to worry about. Source: ATO — Rental income you must declare.
The Airbnb and holiday-home wrinkle
Short-stay income is taxed like any other rent, but the deductions work differently when you mix private use with paying guests. Every expense must be apportioned: rent it out 120 days, use it yourself 60 days, and roughly two-thirds of the year’s ownership costs are deductible (the ATO has published compliance guidance specifically for this — PCG 2026/3). Days the property is genuinely available for rent at market rates count as income-producing days, even if nobody books. If you only rent out a room in your own home, apportion shared expenses on a floor-area basis. The golden rule: the more private use, the smaller the claim — and keep the booking calendar as evidence.
The deductions: what landlords can actually claim
A deduction has to be for producing the rental income, and only for the period the property was rented or genuinely available for rent. Here’s the full list, with what each one looks like in practice:
- Loan interest — the interest portion only, never the principal repayments. Usually the biggest single deduction. And it’s the borrowed purpose that counts: interest is deductible only if the money was used for the rental property.
- Council rates, water rates and land tax — all deductible for the rented period.
- Landlord, building and contents insurance — including rent-default cover.
- Property management and letting fees — typically 4–8% of rent plus a letting fee when a new tenant is found.
- Repairs and maintenance — fixing what’s broken (the next section draws the line).
- Advertising for tenants — listing fees, professional photography.
- Depreciation — both kinds, covered below.
- Borrowing costs — loan establishment fees, lenders mortgage insurance (LMI), broker fees: spread over five years or the loan term, whichever is shorter.
- Legal expenses — for example, evicting a tenant or recovering arrears (not the legal costs of buying the property).
- Accounting and tax-agent fees — apportioned to the rental side of your affairs.
- Gardening, cleaning, pest control, body corporate fees.
What you can never claim: the principal portion of your loan repayments, the purchase price of the property, personal-use costs, and holding costs on vacant land (denied since 1 July 2019). Travel to inspect a residential rental has been non-deductible since 1 July 2017 unless you’re genuinely in the business of letting properties — the drive to check on your one unit doesn’t count.
Repairs vs improvements vs capital works: the line that matters
This is where most landlords get it wrong, and the ATO’s test is about the nature of the work, not the size of the invoice:
- Repair (deductible now): restoring something to its original condition. Replacing a few broken roof tiles with similar tiles. Patching the fence the storm took down.
- Improvement / capital works (deducted over 40 years): replacing the entire roof, remodelling the bathroom, adding a deck. Anything that goes beyond restoration and upgrades the property is capital works — Division 43 — claimed at 2.5% of the construction cost per year over 40 years (for residential construction commenced after 15 September 1987, and structural improvements after 27 February 1992).
- Depreciating asset (Division 40): removable items with a limited life — the oven, dishwasher, carpets, blinds, air-conditioning. Each is depreciated over its ATO effective life. Note: since 1 July 2017, you can’t depreciate plant and equipment that was already in an established property when you bought it — only assets you install.
Two traps worth knowing. First, initial repairs: damage that existed when you bought the property isn’t deductible, even if you fix it on day one — it goes to the property’s cost base for CGT instead. Second, every dollar of Division 43 you claim reduces your cost base when you sell, so the deduction is partly a deferral, not free money. A quantity surveyor’s depreciation schedule ($600–$1,000, itself deductible) is the standard way to document both divisions — essential for new builds, marginal for older units. Sources: ATO — Capital works deductions; ATO — Individual tax return instructions 2026, Item 21 Rent.
Step-by-step: how your net rental income is calculated
On your tax return (Item 21, Rent, in the supplementary section), the ATO wants three numbers: gross rent, interest deductions, and everything else. The calculation is:
- Add up all rental income — rent plus bond kept, insurance payouts, cancelled-booking fees, sharing-economy income.
- Add up all deductible expenses — interest, rates, insurance, management, repairs, depreciation, the lot.
- Subtract expenses from income. The result is your net rental income (or net rental loss, if expenses exceed income).
- Add the net figure to your other income. Net profit increases your taxable income; a net loss reduces it (that’s the negative gearing mechanism, fully covered in our negative gearing guide).
- Apply the tax rates and Medicare levy to the total.
Model the final step any time with our income tax calculator — the full 2026-27 rate table is in our income tax rates guide.
Worked example: $68,000 salary + $30,000 rent (2026-27 rates)
Meet Sarah: a $68,000 salary and a two-bedroom unit rented at $577 a week. Her year:
| Item | Amount |
|---|---|
| Rent ($577/week × 52) | +$30,000 |
| Loan interest | −$11,500 |
| Council rates, water rates, insurance | −$3,700 |
| Property management (7%) + letting fee + advertising | −$3,000 |
| Repairs & maintenance | −$1,900 |
| Capital works depreciation (Div 43: 2.5% of $120,000 building cost) | −$3,000 |
| Plant & equipment depreciation (Div 40) | −$1,400 |
| Borrowing costs amortised + apportioned tax-agent fee | −$650 |
| Net rental income | +$4,850 |
Her taxable income rises from $68,000 to $72,850. At 2026-27 resident rates ($4,020 plus 30c per dollar over $45,000), before offsets:
- Income tax on $68,000 alone: $4,020 + 30% × $23,000 = $10,920
- Income tax on $72,850: $4,020 + 30% × $27,850 = $12,375
- Medicare levy (2%) on $72,850 vs $68,000: $1,457 vs $1,360
- Extra tax from the rental: $1,552 — exactly $4,850 × 32%
The pattern is general: every dollar of net rental profit is taxed at your marginal rate plus the 2% levy. The same $4,850 profit costs about $2,280 at a $200,000 income (47%) and about $824 at $40,000 (17%). It’s the mirror image of negative gearing — run the numbers on your own income with our income tax calculator, and sense-check the purchase itself with our rental yield calculator.
Common mistakes landlords make
- Reporting rent net of agent fees. The ATO wants gross rent as income, then the fees as a deduction. Reporting only what the agent remits understates your income and your deductions — same net, wrong numbers, and an easy audit flag.
- Claiming the whole loan repayment. Only interest is deductible; the principal is never claimable. This is the single most common overclaim on rental schedules.
- Claiming pre-purchase repairs. Anything damaged before settlement is an initial repair — capital, not deductible. It joins the CGT cost base instead.
- Contaminating the loan. Redraw for private spending and that slice of interest stops being deductible — permanently, on an apportioned basis. Separate loan splits from day one.
- Ignoring PAYG instalments. Once your investment income hits $4,000 with tax payable of $1,000 or more on your assessment, the ATO can enter you into the PAYG instalment system automatically — quarterly prepayments toward your tax. It surprises landlords who were used to one bill at tax time. Budget for it from year one.
- Forgetting the sale. When you sell, CGT applies to the gain — the 50% discount holds it at half for 2026-27 (with changes from 1 July 2027; see our CGT discount guide and capital gains tax on property guide), and every Division 43 dollar claimed reduces your cost base. Rental income tax and CGT are one story, not two.
Tips: keeping more of your rent, legally
- Prepay interest before 30 June. Under the 12-month prepayment rule, interest paid in advance for the coming year can generally be claimed this year — a legitimate way to bring a deduction forward.
- Time repairs into rented years. A repair is deductible in the year it’s done, but only while the property is genuinely available for rent. That $2,000 fix done during a three-month vacancy between tenants still counts — done while you’re living in it doesn’t.
- Get the depreciation schedule early. You can only claim what you can document. A quantity surveyor’s report on a new or renovated property pays for itself many times over.
- Keep five years of records. The ATO requires rental records for five years from when you lodge — every invoice, every bank statement, the loan statements, the depreciation schedule. Digital copies are fine; a shoebox of fading receipts is not a system.
- Apportion ruthlessly on mixed-use property. Holiday home with private stays? Claim only the rental share. The ATO’s data-matching on short-stay platforms is only getting sharper.
FAQ: the questions landlords actually ask
Do I pay tax on my rent or on my profit?
Your profit. The ATO adds your gross rent to your return, subtracts your deductible expenses, and taxes the net at your marginal rate. On a $68,000 salary with $4,850 of net rental income, that means $1,552 extra at 2026-27 rates — not tax on the full $30,000 of rent.
I fixed the place up before renting it out. Can I claim the repairs?
No — those are initial repairs. Damage that existed when you bought the property is a capital cost: not immediately deductible, but added to the CGT cost base so it reduces your eventual capital gain. Only wear and tear that happens while the property is rented (or available for rent) counts as a deductible repair.
I redrew $30,000 from my investment loan for a new car. Is all the interest still deductible?
No. The ATO’s purpose test looks at what each dollar borrowed was used for. The interest on the $30,000 car portion is private and never deductible, and you must apportion every interest bill between the investment and private portions from then on. The structural fix is separate loan splits — never run personal spending through the investment facility.
Do I really have to declare Airbnb income if I only rented it out for a few weeks?
Yes — all of it, from the first night. There’s no minimum threshold, and the ATO receives data from the platforms. You do get to apportion: expenses are split between rented days, private-use days, and genuinely-available days, and a depreciation schedule still applies. Keep your booking calendar; it’s your evidence.
Can I claim the flights and petrol for visiting my rental property?
Almost certainly not. Since 1 July 2017, travel to inspect, maintain or collect rent for a residential rental property is non-deductible for individuals, unless you’re genuinely carrying on a property-letting business. A property manager’s fees are deductible; your own travel isn’t.
Do I pay tax on my tenant’s bond?
Only the part you keep. A bond refunded in full is never income. If you retain bond money in place of unpaid rent, or keep it to cover damage repairs, that retained amount is assessable rental income in the year you keep it.
The bottom line
Rental income tax is simpler than it looks and easier to get wrong than it should be. Declare the gross — every dollar of rent, the bond you kept, the insurance payout, the Airbnb nights. Deduct everything the rules allow — interest, rates, management, genuine repairs, both kinds of depreciation — and nothing they don’t: principal repayments, private redraws, pre-purchase fixes, travel. What’s left is your net rental income, taxed at your marginal rate like any other dollar you earn.
Do that cleanly and the system works as designed: a profitable property contributes its fair share, and every legitimate deduction stays claimed. The landlords who overpay are the ones who miss depreciation they were entitled to or misclassify repairs as improvements. The ones who underpay — gross rent reported net of fees, bond kept and forgotten, Airbnb income “too small to matter” — are the ones the ATO’s data-matching is built to find. Keep the records, know the lines, and the maths takes care of itself.
