From an investment property's purchase to the sale: what you can claim and when

Buying an investment property is exciting, but the time between signing the contract and your first tenant can be confusing for tax purposes.

Some costs are deductible straight away; others are added to your cost base for capital gains tax (CGT) and some can only be claimed through depreciation over time.

The same applies at the end of ownership when preparing a property for sale. Knowing the difference helps you save tax now and maximise your position later.

It is particularly important to get the tax return right, with the Australian Taxation Office (ATO) specifically targeting property investors.

From contract to settlement

At this stage you are not yet the owner, so nothing is deductible.

Costs such as legal fees, stamp duty on the purchase, buyers agent fees and pre-purchase inspection reports (building, pest and similar) are added to the property’s cost base.

These will reduce your CGT when you eventually sell but they do not provide an annual deduction.

Loan establishment fees and other borrowing costs are treated slightly differently. These are not deductible before the property is producing income, but once the property is available for rent, they can usually be written off over five years (or the term of the loan if shorter), rather than being added to the CGT cost base.

Settlement to first advertisement

Once settlement is completed, you start paying holding costs like loan interest, rates, insurance and body corporate fees.

Until the property is genuinely available for rent, these expenses are not deductible. Instead, they can be added to your CGT cost base and help reduce your capital gain on sale.

Any renovations conducted in this period are also not immediately deductible. They are considered capital expenditure, although once the property is available for rent you may be able to claim them gradually as capital works deductions.

From first advertisement to tenant moving in

The key turning point is when the property is first advertised or listed for rent. From this date:

• loan interest, council and water rates, insurance, body corporate fees and advertising costs become deductible, even if the property is still vacant
• property management and letting fees are deductible in the year you pay them
• repairs to fix damage or wear that happens while the property is available for rent are deductible, however, work that fixes issues already present when you bought the property is classed as an “initial repair” and is not deductible up front (these costs are capital and may instead be depreciated or added to your cost base).
• improvements and renovations (e.g., a new kitchen or extensions) are capital expenses, which are not deductible immediately but can be claimed over time through capital works depreciation (note: a renovation strategy should always be reviewed with an eye on both the rental market and your longer-term tax outcomes).

While the property is rented or available for rent

From the day the property is first advertised until the day it ceases being available for rent, expenses remain deductible. This includes:

• loan interest, council and water rates, insurance, land tax, body corporate fees and property management fees
• advertising for new tenants and leasing costs
• repairs to maintain the property in tenantable condition (excluding initial repairs)
• depreciation on eligible new assets and capital works.

If the property is vacant for a brief period between tenants but is genuinely available for rent, these holding costs continue to be deductible.

The key test is whether the property is actively marketed and available, at normal market rent, not whether it is physically occupied.

A note on depreciation rules

Depreciation can be claimed on new assets you install, as well as on eligible capital works.

Since 2017, however, you generally cannot claim depreciation on second-hand fixtures and fittings that came with the property when you bought it.

This makes record-keeping important so note the cost and installation date of any new assets so you can claim them correctly.

Final stage: preparing for sale and settlement

When you decide to sell, there may be a period where the property is vacant while being prepared for sale, advertised and then waiting for settlement.

For example, you might leave it empty for three months while repainting, replacing carpets and listing it for auction.

Holding costs (interest, rates, insurance, utilities) during this period are not deductible, as the property is no longer producing income and is not available for rent.

Renovations or cosmetic updates to improve the sale price are not deductible as repairs but can be added to your CGT cost base. This is another point where planning is important: some upgrades add genuine value, while others risk overcapitalisation and may not deliver the return you expect.

Selling costs such as agent’s commission, marketing fees and legal costs are also added to the cost base.

These amounts increase your cost base and reduce the CGT when the property is sold, but they do not create deductions in the year of sale.

Note on depreciation and CGT

It is important to remember that any depreciation claimed during ownership, both capital works and plant and equipment, reduces your cost base.

This means the deductions you claim along the way will increase your taxable capital gain when the property is sold.

In practice:

• you benefit each year from tax deductions while renting
• when you sell, the ATO requires you to adjust your cost base down by the total depreciation claimed
• this prevents “double dipping” by claiming both deductions during ownership and again in your CGT cost base.

This is not a reason to avoid claiming depreciation. It usually works in your favour, as the yearly deductions bring forward the tax savings and the CGT discount often reduces the amount you give back on sale.

The importance of proper tax planning

The tax treatment of an investment property depends heavily on the timeline between purchase and first tenant and again at the end when you prepare it for sale. Some costs are deductible immediately, others add to your cost base and some are claimed gradually over time.

This is where tax planning has influence.

The type of renovations you choose, the way you structure your borrowing costs and the timing of a sale can all change the outcome.

A clear plan can help you avoid overcapitalisation, capture the right deductions each year and minimise CGT when you eventually sell.

Keeping receipts and recording dates is essential, but advice tailored to your circumstances is just as important.

Every investor’s situation is different, so if you want to be sure you are claiming correctly and planning ahead for CGT, book a consultation with your accountant to review your investment property strategy.