Rental Renovation Tax Deductions: ATO Guide 2026

Rental Renovation Tax Deduction: What Landlords Need to Know

Not all rental renovations are treated the same when it comes to tax. Some expenses can be claimed right away. Others — especially structural or long-term improvements — must be written off slowly under what's called a capital works deduction. Here's how to tell the difference so you stay compliant and don’t miss out on valid deductions.

This guide is based on dozens of landlord questions across our renovation tax posts — especially the ones asking things like, “Can I claim the full cost of my kitchen reno this year?” or “Is painting a wall a repair or capital?” View ATO official guide on capital expenses

Rental Renovation Tax Deduction Quick Guide

• Repairs (e.g. patching, replacing broken tiles): often fully deductible in the year paid
• Capital works (e.g. new roof, kitchen remodel): claimed over 40 years at a fixed %
• Appliances: claimed separately under depreciation rules
• Mix of both? You may need to split and apportion
• Best practice: Use a quantity surveyor or tax agent to get it right

Quick questions on Rental Renovation Tax Deductions

Is a rental renovation tax deductible?

Yes — but not always immediately. Basic repairs are often deductible in the year you pay them. However, major improvements or upgrades are classed as capital works and must be claimed slowly over time, usually at a fixed annual rate. The type of work determines how and when you can claim.

What is a capital works deduction on a rental property?

A capital works deduction allows landlords to claim part of the cost of eligible building or structural improvements over time. You can’t claim it all in one go. Things like extensions, new bathrooms, or rewiring generally fall under this category. The ATO sets the annual deduction rate, usually spread over 40 years.

Can I claim a deduction for a new kitchen in my rental?

If it’s a full kitchen renovation, it will likely be treated as a capital works deduction — not an immediate expense. You’ll need to write off the cost over time. If you just replace a broken cupboard door or fix tiles, that could count as a repair and be deductible in the same year. Keep detailed records either way.

“I claimed the full bathroom reno as a deduction last year and got flagged by the ATO. Turns out it was capital works. Wish I’d known the difference.”–  Valentin B

Got a teen starting casual or part-time work? This guide explains TFNs, tax, and super in plain English — perfect for Aussie parents.

How Rental Renovation Tax Deductions Work

Understanding what you can and can’t claim on rental renovations is one of the most confusing areas for landlords. The good news? There are clear ATO guidelines — once you know the difference between a repair, a capital improvement, and a capital works deduction.

This section breaks it down in plain language, with examples drawn from real landlord experiences.

Repairs vs Renovations vs Capital Works

Let’s start by defining the key terms — because this is where most mistakes happen.

Example:

• Repainting a flaking wall = repair
• Installing a brand-new kitchen = capital works
• Replacing a few broken tiles = repair
• Re-tiling the whole bathroom = capital works

A landlord on our whatapp group asked: “Is fixing a leaky tap deductible?”

Yes — that's a repair. But upgrading the whole bathroom tapware as part of a reno would be capital.

When Renovation Costs Are Immediately Deductible

You can usually claim renovation costs right away (in the year you incur the expense) if they are:

• Restoring part of the property to its original condition
• Fixing wear and tear from tenants
• Replacing like-for-like (e.g. cracked window pane)
• Resolving damage (e.g. repairing storm damage)

But there’s a catch: the property must already be available for rent at the time. If you do the work while living in the home or before it hits the rental market, deductions may not apply.

When Renovation Costs Must Be Written Off Over Time

If your renovation:

• Adds something new (e.g. a second bathroom)
• Increases value (e.g. full kitchen remodel)
• Extends the structure (e.g. building a deck)
• Permanently alters the property’s layout

…it’s considered capital works. You can’t claim the full cost in one year. Instead, you’ll write off the cost gradually under the capital works deduction rules.

Example from our clients:

“I replaced all the carpet with floorboards and thought I could claim it all. Our tax agent said nope — capital works.” – Amish P

What Is a Capital Works Deduction?

When you renovate your rental property, not all expenses are immediately deductible. Structural improvements and permanent upgrades typically fall under what's called a capital works deduction — meaning you claim the cost slowly over time. Here's what that looks like in practice.

Capital Works vs Depreciation on Assets

So, if you install a new built-in wardrobe, that’s capital works. But if you buy a freestanding bookshelf, that’s a depreciable asset.

Both can be claimed — but under different rules and over different timeframes.

Which Renovation Costs Are Capital Works? (Examples)

According to the ATO, the following rental renovations are considered capital works:

• Building extensions or structural additions
• Bathroom or kitchen renovations
• Replacing structural flooring (e.g., entire carpet or tiles)
• Driveways, retaining walls, or fencing
• Adding built-in furniture or storage
• Roof repairs where significant replacement is involved
• Constructing or replacing internal walls

Note: Even repairs that improve the property beyond its original state can fall under capital works. This is where many landlords get caught.

Real-life example:

“We replaced our 1970s kitchen with a brand-new open-plan one — added value, changed layout. Our accountant said that’s capital works, not a repair.” - Renae P.

Typical Deduction Rates and Time Periods

Under ATO rules, most eligible capital works expenses are deducted over 40 years at a set annual percentage rate (e.g., 2.5% per year).

The start date for claiming generally begins from when the:

• Work was completed and
• The property was available for rent

If the renovation happens during a vacancy or before tenants move in, you still may be able to claim — but only from when it becomes genuinely available for income-producing purposes.

Tip: You must apportion if part of the work was for private use, or if you lived in the property during the renovation.

Always check with a tax agent for your specific dates and eligibility.

Common Rental Renovation Expenses and Their Tax Treatment

Not sure if your renovation work counts as a repair or capital improvement? You’re not alone. Many landlords assume they can claim the full cost in one go — but that only applies to repairs, not capital works.

Here’s a breakdown of some of the most common renovation jobs and how they’re generally treated for tax.

Painting, Patching and Minor Repairs

Generally deductible in full.

If you're:

• Repainting walls damaged by tenants
• Patching holes or cracks
• Fixing door handles or light fittings
• Replacing broken tiles
• Repairing a leaking tap or pipe

…these are usually considered repairs or maintenance. They’re tax-deductible in the year you incur the expense, as long as the property is already available for rent.

Example:

"We painted the unit after the last tenant moved out and before the new one moved in. Our accountant confirmed it was a deductible repair." – Muhammed Tahir

Watch out: If the painting is part of a bigger renovation (e.g. after changing the kitchen layout), the ATO may consider it part of the capital works project — and not immediately deductible.

Kitchen and Bathroom Upgrades

Usually capital works.

• Full kitchen or bathroom remodel
• Replacing cabinets, benchtops, or built-in storage
• Moving fixtures or changing layout
• Upgrading plumbing or electrical wiring

These are structural and usually not like-for-like — meaning they add value and must be claimed over time under the capital works deduction.

Mixed example:

If you replace a cracked tile in a bathroom, that’s a repair.

If you re-tile the entire bathroom or upgrade fixtures as part of a modernisation, that’s a capital improvement.

Structural Changes and Extensions

Always capital works.

If you're doing any of the following:

• Building an extension
• Knocking down or adding internal walls
• Converting a garage or laundry into a living space
• Adding a second story
• Constructing new fencing, pergolas, carports, or sheds

…it’s structural, long-term work. You’ll need to spread the cost over time using the capital works deduction rules.

Reminder: Keep all documentation — including building approvals and invoices — and speak to a quantity surveyor or tax agent about claim timing.

Flooring, Roofing and Windows

This can go either way, depending on the scope:

Deductible Repairs (immediate):

• Fixing a broken windowpane
• Repairing a roof leak
• Replacing one damaged floorboard

Capital Works (claimed over time):

• Replacing all the flooring (e.g. installing floorboards or tiles throughout)
• Full roof replacement
• Installing double-glazed windows or new window frames

“We replaced the carpet in two rooms with timber floors — turns out that was capital works. Didn’t expect that.” - Edmond T

How to Work Out Your Capital Works Deduction

If you’ve made structural improvements to your rental — like a kitchen renovation, bathroom upgrade, or extension — chances are you won’t be able to claim the full amount in one go. Instead, you’ll need to work out your capital works deduction and claim it over time.

Here's how to do it, step by step.

Step-by-Step to Calculate Your Annual Deduction

Step 1: Identify eligible capital works

Make a list of structural or permanent improvements you’ve made — anything from retiling to full renovations or extensions.

Step 2: Confirm construction completion date

The ATO requires you to claim deductions starting from the date construction was completed and the property was genuinely available for rent.

Step 3: Work out the total cost

Include all expenses directly related to the construction or renovation, such as:

• Materials
• Labour (including tradespeople)
• Architectural or engineering fees
• Council approvals and inspections

Step 4: Apply the deduction rate

The ATO’s general capital works deduction rate is 2.5% per year over 40 years. Some older buildings or special use cases may have different rates, so check with a tax agent.

Step 5: Claim the deduction each year

Once the work is done and the property is rented or available, you can begin claiming your annual deduction.

Example Calculation (High-Level Only)

If you spent $40,000 on a structural kitchen renovation and it qualifies for capital works at 2.5%:

$40,000 × 2.5% = $1,000 per year for 40 years

You’d claim $1,000 each year in your tax return, starting from the financial year the reno was completed and the property was available for income.

Reminder: Always check the current ATO rate, as deduction percentages may vary depending on the construction date and type of work. ATO Capital Works Guide

Using Quantity Surveyor Reports and Invoices

If you don’t have exact cost records (especially for older properties or bundled renovation quotes), you can use a quantity surveyor to produce a depreciation and capital works schedule.

• Quantity surveyors are recognised by the ATO
• They estimate the value of your capital works based on construction data and market rates
• Their report can be used by your tax agent to calculate your yearly deductions accurately

"We didn’t keep detailed invoices for our reno, so our accountant got a quantity surveyor to prepare a report. It’s now part of our tax records." - Jacqueline P

Tip: Not all accountants do this automatically. If you’ve made significant changes to your property, ask whether a quantity surveyor report is worth the investment.

Record-Keeping Landlords Should Maintain

Good records = safer claims and faster tax prep. Here’s what to keep for any renovation that might fall under capital works:

• All invoices and receipts for materials and labour
• Copies of council permits or approvals
• Contracts or scope of works from builders
• Dates of construction start and completion
• Property availability dates (e.g. when advertised for rent)
• Quantity surveyor reports (if applicable)

Store these securely for at least five years after your last deduction is claimed (which could be 40 years from now).

Other TFN related articles

• How to find TFN on centrelink
• How to find my TFN

Frequent Landlord Mistakes With Renovation Claims

Renovating your rental? Great. Claiming the wrong deduction? Not so great.

Each year, many landlords make simple tax mistakes when it comes to claiming renovation costs — and it’s often due to misunderstanding what’s deductible now vs what has to be spread over time.

Here are the biggest traps to avoid.

Mistake 1: Treating Improvements as Repairs

The issue: You replace a kitchen, renovate a bathroom, or install new flooring — and claim the full cost as a “repair”.

Why it’s wrong: The ATO treats structural or substantial changes as capital works, not repairs. Claiming the full cost in one go could trigger a tax audit.

Real Example from our clients:

“I put in a new kitchen and claimed it all. Got flagged by the ATO and had to amend my return. Didn’t realise that counted as capital.”

Mistake 2: Claiming the Full Renovation Cost in One Year

The issue: You spent $30,000 on renovations and claimed the entire amount as a deduction in the same year.

Why it’s wrong: Unless it’s purely repairs and maintenance, most structural improvements must be claimed over 40 years at 2.5% per year (capital works). Appliances are depreciated separately. You can’t deduct lump sums for major works unless clearly eligible.

What to do instead: Break down your renovation invoice into:

• Capital works (long-term building items)
• Depreciating assets (ovens, blinds)
• Immediate repairs (if any)

And claim each category accordingly.

Mistake 3: Forgetting to Apportion Private vs Rental Use

The issue: You renovated the entire property — including areas used for personal reasons — and claimed 100% of the cost.

Why it’s wrong: If part of the property was used for private purposes (e.g. you lived in it before tenants moved in), you need to apportion the cost and only claim the rental-use portion.

ATO example: If a renovation was completed while you were still living in the property, and you rented it out halfway through the year, you may only be eligible to claim 50% of that year’s capital works deduction.

What to do: Keep clear records of:

• When the property became available to rent
• When construction was completed
• Any private use periods

And provide these to your tax agent.

Mistake 4: Not Updating Claims After a Major Renovation

The issue: You made a significant change (e.g. demolished part of the property or fully rebuilt a section) but continued using your old depreciation or capital works schedule.

Why it’s wrong: Capital works schedules must be updated to reflect major changes. You may no longer be entitled to claim deductions on demolished parts, and you need to account for the cost base of new work correctly.

What to do:

• Engage a quantity surveyor for a revised capital works schedule
• Tell your tax agent about major changes
• Recalculate your claimable amounts based on current structure and cost

Closing Comments

Understanding how rental renovations are treated for tax can help you avoid costly mistakes — and maximise your returns legally. Whether you're fixing a wall or renovating a kitchen, it pays to know when you're dealing with a repair or a capital works deduction.

About the Author

Vicky Sarin is a Chartered Accountant with 25+ years' experience and a focus on helping Australian property owners navigate rental tax rules. Based in Sydney, he’s helped thousands of landlords understand their renovation deductions through education, not jargon.