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Buying an Investment Property: Getting the Foundations Right
Investing in property is about more than just picking the right house in the right suburb. To truly maximise your returns and avoid costly mistakes, you need to understand how property ownership works from a tax and legal perspective. The choices you make at the beginning—like whose name goes on the title, how you handle expenses, and what you can claim—can have long-term impacts on your wealth and cash flow. In this blog post, we break down the key aspects that every smart investor should consider before signing on the dotted line.

Whose Name Should You Buy the Property In?
One of the first decisions is whose name should be on the title. If you buy the property jointly with your partner, income and losses from the property are typically split 50/50, regardless of who paid more. This is important because if one partner is in a higher tax bracket, the value of any tax-deductible losses is greater for them—they can offset more tax.

Some investors use a family trust to buy property. Trusts can offer flexibility in distributing income to family members in lower tax brackets, which can reduce the overall family tax bill. However, there’s a catch: if your investment property runs at a loss (negative gearing), those losses are “trapped” in the trust and can’t be used to offset your personal income. They can only be used to offset future income earned by the trust.

Understanding Negative Gearing and Positive Gearing
Negative gearing gets a lot of attention in the property world. Essentially, if your rental income doesn’t cover your expenses, you make a loss—and that loss can reduce your taxable income, lowering your tax bill. Now, it’s important to remember: you’re still losing money overall! Negative gearing is not a long-term investment strategy on its own; rather, it’s a temporary cashflow cost that investors accept in exchange for the hope of future capital gains when the property increases in value.

You also need to consider how negative gearing affects your borrowing capacity. Banks are more interested in seeing steady income than tax deductions. If you’re always showing losses, it can actually make it harder to get approved for your next loan. It’s all about finding the right balance between tax benefits and maintaining a healthy cashflow.

On the flip side, if your property is positively geared—meaning your rental income exceeds your expenses—you’ll have to pay tax on the profit. But this is a good problem to have, because it means your investment is actually putting money in your pocket each month.

Understanding the 50% Capital Gains Tax (CGT) Discount
When you sell an investment property, you may need to pay capital gains tax (CGT) on any profit you make. The good news is, if you’ve owned the property for more than 12 months, individuals and trusts are generally entitled to a 50% CGT discount. This means only half the capital gain is taxed at your marginal tax rate. For example, if you made a $100,000 profit, you’d only pay tax on $50,000. This discount doesn’t apply to companies, so the ownership structure really matters.

Why Do Some Investors Buy Property Through a Company Structure?
While company ownership is less common for residential investment properties—mainly because companies miss out on the 50% CGT discount and the 6-year main residence exemption—it is a popular and practical choice for commercial property. Many businesses purchase their premises through a company for asset protection, as a company is a separate legal entity and can shield personal assets from business risks or creditors.

It’s important to note that if the same company both owns the property and operates the business, the property itself can still be at risk. If the operating company is sued or becomes insolvent, creditors can pursue all assets owned by that company—including the commercial property. To better protect valuable assets, many business owners use a separate holding company to own the property and lease it to the trading company that runs the business. This structure helps isolate the property from operational risks.

Company ownership also offers tax planning advantages. Companies are taxed at a flat rate of 25% for base rate entities (generally small businesses) and 30% for other companies as of May 2025. For high-income earners or businesses, this flat rate can be lower than the top marginal tax rates for individuals.

Companies may face higher borrowing costs. Lenders often view companies as higher risk because their finances can be less predictable, companies can be wound up or become insolvent, and the lender’s recourse is typically limited to company assets unless directors provide personal guarantees. As a result, banks may impose stricter lending criteria or higher interest rates for company borrowers.

In summary, company structures are typically used for commercial property investment or by investors who prioritise asset protection, want to retain profits within the business, or have specific tax planning needs—despite the less favourable CGT treatment and potential financing challenges for residential property.

What Expenses Can You Deduct?
There are many expenses you can claim as tax deductions to help offset your rental income:

Loan Interest: The interest portion of your mortgage repayments is deductible, but not the principal. This is often one of the largest deductions for property investors. However, if your loan is used for both investment and personal purposes—a situation known as a “mixed-use” or “mixed-purpose” loan—you can only claim the interest attributable to the investment portion. For example, if you redraw funds from your investment loan to buy a car or pay for a holiday, you need to apportion the interest and only claim the part that relates to the rental property. The ATO requires you to keep accurate records and calculate the deductible portion based on how much of the loan was used for income-producing purposes versus private use.
Council Rates, Water, and Strata Fees: These ongoing costs are deductible for the periods your property is rented or genuinely available for rent.
Insurance: Landlord and building insurance premiums are deductible, as are other property-related insurances.
Advertising for Tenants: The costs to advertise your property and find tenants can be claimed as immediate deductions.
Repairs and Maintenance: Expenses for repairing or maintaining the property (such as fixing a broken tap or replacing a damaged blind) are deductible in the year you incur them. However, if you make improvements or upgrades (like renovating a kitchen or replacing all the blinds), these are considered capital expenses and must be depreciated over time, rather than claimed immediately.

Apportionment of Expenses:
If your investment property is only rented out for part of the year, used for private purposes at times, or only part of the property is rented (such as a granny flat or a single room), you must apportion your expenses accordingly and only claim the portion that relates to earning rental income. Always keep detailed records of how your loan funds are used and how your property is occupied throughout the year. This ensures you claim the correct deductions and stay compliant with ATO requirements.

Repairs vs. Capital Improvements: Why the ATO Is Watching Closely
Repairs and maintenance are costs to fix damage or wear and tear that occurred while you owned the property—such as replacing a broken blind or fixing a leaking tap—and these are generally immediately deductible. In contrast, capital improvements are upgrades or works that add value to the property or extend its life, like replacing all the blinds, renovating the kitchen, or adding a new deck. These costs can’t be claimed as an immediate deduction; instead, you claim them over time through depreciation or capital works deductions.

This distinction is a major focus for the ATO, which has found that many landlords incorrectly claim capital improvements as repairs to get a larger, immediate tax deduction. The ATO has publicly stated that 9 out of 10 rental property returns contain errors, with repairs versus improvements being one of the most common mistakes. Because of this, the ATO is ramping up audit activity and using sophisticated data analytics to flag tax returns where the “other rental deductions” figure is unusually high or out of line with typical expenses for similar properties.

Triggers for an audit include:

Large or unusual claims for repairs and maintenance, especially if they are significantly higher than average or follow the purchase of a property (since “initial repairs” are not deductible but must be capitalised).
Deductions that don’t match the type of work done (for example, claiming a full kitchen replacement as a repair).
Inadequate or vague record-keeping, or failing to provide clear documentation when requested.

If you incorrectly claim a capital improvement as a repair, the ATO may disallow your deduction, require you to amend your tax return, and potentially impose penalties. To avoid unwanted attention, it’s essential to carefully distinguish between repairs and improvements, keep detailed records, and seek professional advice if you’re unsure. Getting this right not only ensures compliance but also helps you avoid costly audits and penalties.

Depreciation: Claiming Wear and Tear
If your investment property is relatively new (built within the last 10–15 years) or has undergone significant renovations, engaging a qualified quantity surveyor to prepare a depreciation schedule is one of the smartest financial moves you can make. This report breaks down two key types of deductions:

Capital Works Deductions: For the structural elements of the building (e.g., walls, roofing, plumbing), claimable at 2.5% annually over 40 years for properties built after September 1987.
Plant and Equipment Depreciation: For removable fixtures like carpets, blinds, appliances, and air conditioners, calculated based on their effective lifespan (e.g., 10 years for a dishwasher).
The cost of a depreciation schedule typically ranges from $385–$770, but this fee is 100% tax-deductible and often pays for itself many times over. For newer properties, investors can claim $9,000–$15,000 in deductions in the first year alone, with total savings reaching $40,000–$60,000+ over five years. Even older properties (pre-1987) benefit if they’ve been renovated—capital works deductions apply to updates like kitchen upgrades or bathroom remodels, while new appliances or flooring added by you qualify as plant and equipment.

New builds tend to maximise deductions because:

The full 40-year capital works period is available.
Brand-new fixtures depreciate faster in early years (e.g., a $1,500 oven depreciates at 20% annually under diminishing value).

A depreciation schedule is a one-time investment that unlocks deductions for up to 40 years, ensuring you comply with ATO rules and avoid costly audits. Forgetting to claim depreciation is like leaving cash on the table—especially when the schedule’s cost is dwarfed by the tax savings it generates.

Tip: Always use a registered quantity surveyor—they’re the only professionals the ATO recognises for preparing depreciation schedules, ensuring your claims are accurate and defensible.

Purchase Costs: What Can You Claim and When?
When you buy an investment property, you’ll incur costs including: stamp duty, legal fees, and building inspections. These aren’t immediately deductible, but they’re not wasted! Instead, you add them to your property’s “cost base,” which reduces the capital gain (and therefore the CGT) when you sell.

Exception: In the ACT, there’s a unique rule. Because you’re technically leasing land from the government, stamp duty is immediately deductible—an unusual but handy benefit for ACT investors.

Turning Your Home into an Investment
Many people choose to rent out their home when they move. The ATO offers a valuable 6-year Capital Gains Tax exemption rule for these situations. If your property was your main residence before you started renting it out, you can continue to treat it as your main residence for CGT purposes for up to six years while it’s rented. This means any capital gain made during this period is exempt from CGT, provided you don’t nominate another property as your main residence during that time. If you move back in, the six-year period resets, and you can use the exemption again if you later rent it out. There’s no limit to how many times you can do this, as long as you re-establish the property as your main residence between rental periods. Keeping detailed records and knowing your dates is key to make the most of this exemption.

Note: The 6-year exemption rule is ONLY available to individuals. Trusts / Companies cannot make use of this benefit.

Renting Out a Granny Flat: Tax and CGT Implications
Adding a granny flat to your property can be a smart investment strategy, either to generate rental income or provide accommodation for a family member. However, the tax treatment depends on how the granny flat is used:

Private Use: If a family member (such as an elderly parent) lives in the granny flat under a formal, non-commercial arrangement (no market-rate rent), generally there are no CGT consequences when you sell your home, and the main residence exemption still applies.

Commercial Use: If you rent out the granny flat to a tenant (or even a student) at market rates, the income must be declared, and you can claim deductions for related expenses. However, this also means a portion of your property is being used for income-producing purposes, so when you sell, you may lose part of your main residence CGT exemption. The CGT will only apply to the proportion of the property used for rental and for the period it was rented. If you’ve owned the granny flat for more than a year, you may be eligible for the 50% CGT discount on any gain from that portion.

Working from Home: When Does It Trigger Capital Gains Tax?
With more Australians working from home than ever before, it’s important to understand how this can affect your main residence exemption for Capital Gains Tax when you eventually sell your property. Generally, if you work from home and only claim running expenses—such as electricity, internet, or cleaning—there are no CGT implications. This is because you haven’t set aside a specific area exclusively for business use, and you’re not claiming occupancy expenses. For example, if you work from the kitchen table or a shared living space and only claim running costs, your full main residence exemption remains intact.

However, CGT can come into play if you run a business from home and either claim occupancy expenses (like mortgage interest, council rates, or insurance) or set aside a dedicated area of your home solely for business purposes. In these cases, when you sell your home, you may lose part of your main residence exemption, and CGT could apply to the portion of your home used for business, and for the period it was used that way. The calculation is based on the floor area used for business, the length of time it was used, and the value of the property when you first started using it to produce income.

A good rule of thumb: occasional or hybrid work from home—where you use a shared space and only claim running costs—generally does not affect your CGT exemption. However, if you operate a business from a dedicated home office and claim occupancy expenses, keep detailed records and seek professional advice to avoid any unexpected tax bills down the track.

Selling Your Property: Key Capital Gains Tax Tips
Capital Gains Tax is triggered when you sell an asset, such as an investment property, for more than your cost base—the total of what you paid for it, including the purchase price, stamp duty, legal fees, and any capital improvements you’ve made over the years. The good news for property owners is that if you’ve held the asset for more than 12 months, individuals and trusts are generally entitled to a 50% CGT discount, meaning only half your capital gain is added to your taxable income and taxed at your marginal rate. It’s important to remember that the sale date for CGT purposes is the date you sign the contract, not the settlement date. This means if you sign a contract just before 30 June, the gain will be taxed in that financial year—even if settlement occurs after. Keeping detailed records of all your purchase and improvement costs is essential to accurately calculate your cost base and minimise your CGT liability.

Land Tax
Land tax is a state-based, annual tax on the unimproved value of investment and commercial land, and it can significantly impact your cash flow as your property portfolio grows. Each state and territory in Australia has its own thresholds, rates, and rules. Your principal place of residence is usually exempt, but most investment properties, commercial properties, and vacant land are subject to land tax.

Thresholds and rates vary widely. For example, in New South Wales, land tax applies once your total land value exceeds $1,075,000 (as of 2025), while in Victoria, the threshold is just $50,000. Queensland’s threshold for individuals is $600,000. Rates are progressive, so the more land you own, the higher your tax bill. Trusts and companies often face lower thresholds and higher rates, and foreign owners may also be subject to surcharges in some states.

Land tax is assessed annually based on your landholdings as of a specific date, and if you own property in multiple states, you may pay land tax in each one separately. Because rules and rates change frequently, it’s important to check the latest information for each state and factor land tax into your investment decisions. Overlooking this cost can lead to unexpected annual expenses that reduce your overall returns.

Other Must-Know Tips for Property Investors
There are a few extra strategies and pitfalls every property investor should be aware of. If you want to maximise your deductions, consider prepaying interest on your investment loan before 30 June; this allows you to bring forward a full year’s worth of interest as a deduction in the current financial year, which can be handy for tax planning. Be cautious when using redraw facilities on your loan—if you use the same loan for both personal and investment purposes, the interest may not be fully deductible, and you could end up with a complex situation that’s hard to unravel at tax time. Most importantly, always seek professional advice before you buy. Restructuring your property ownership later can be costly or even impossible, and what works for your friend or neighbour might not be right for your circumstances. Getting the right structure and strategy in place from the start is key to long-term investment success.

Conclusion
Property investment can be a powerful way to build wealth, but only if you understand the tax rules and get your structure right from the start. From choosing the right ownership structure and maximising your deductions, to understanding how capital gains tax and the 6-year exemption work, every decision can have a long-term impact on your finances. Remember, what works for one investor may not work for another—so always seek tailored advice before you buy or restructure. With careful planning, good records, and the right support, you can minimise your tax, maximise your returns, and invest with confidence.