How is tax on a rental worked out each year?

The tax on a rental is worked out on a different sum from the cash it leaves. For a property in your own name, the rent you receive less the deductions the tax rules allow goes into your personal tax calculation.

Loan principal, the part of a repayment that pays back the amount borrowed, is not a deduction, although it uses cash. Depreciation is a deduction that needs no new payment that year. A rental loss can reduce your other income in 2026-27, and new limits start in 2027-28.

Tax on a later sale is a separate calculation. This is the law as read on 15 October 2026.

How much of my rent is taxable?

Start with the rent received, counted before the agent takes out fees. Take off the deductions allowed for that financial year. What remains is the rental profit or loss that goes in your return.

The ATO's rental income guide says income includes rent paid to your agent even if it has not reached your bank, and other receipts such as insurance payments that replace lost rent. Reporting only the agent's net deposit can leave income out.

The rental property tax calculator adds the rent, the costs and the loan interest for one year.

Income and expenses generally follow your legal ownership shares, so they cannot be moved to the lower earning owner. An exception is interest on a loan one owner took out only to buy their own share.

The ATO's rental expenses guide separates costs you can deduct now, such as council rates and eligible repairs, from improvements, which are generally spread over years as capital works deductions. Private use changes the sum, because a property you also use yourself needs its costs divided.

A holiday home has further limits, so dividing by rental days may not be enough.

Why is taxable rent different from cash left?

Cash left before tax starts with the rent received and takes off the operating costs and the full loan repayments. The tax sum treats parts of that spending differently.

Principal pays back the amount borrowed, so it uses cash and is not a deduction. Interest may be deductible, depending on what the borrowed money paid for. The ATO's interest guidance says private borrowing does not become deductible just because a rental property secures the loan.

Depreciation works the other way. Eligible deductions for a building's construction cost or an appliance's decline in value lower taxable rent without a payment that year, because the cash went out earlier.

So a rental's tax result cannot be read from its bank balance. What is left of the rent after costs? follows the money.

How does the rental change my tax bill?

A deduction lowers the income being taxed. It does not refund the whole expense. The effect depends on your other income and the rules for the year.

In the example household, the owner page estimates the 2026-27 tax at $60,167 with one rental and $57,802 without it, so the rental adds $2,365. That is an estimate from those records, not a rate for your rent.

Can a rental loss reduce my other income?

The ATO calls a property negatively geared when its deductible expenses are more than its rent. For 2026-27, that loss can offset other income, such as wages. An unused loss may be carried forward under the tax loss rules.

It does not mean every property cost is deductible.

Do the negative gearing changes apply yet?

The changes are law, but the new annual loss limit does not apply to 2026-27. Schedule 2 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 began on 27 June 2026, and the limit starts in 2027-28. The ATO's reform notice confirms it is enacted.

The negative gearing calculator shows the 2027-28 rule on one rental, and the post on properties you already own explains the cutoff.

For covered residential property, the excess of deductions over rent cannot reduce wages or other unrelated income that year. It is held apart and can be used against eligible residential capital gains, with any rest carried forward against later rent.

The limit is worked out across all of an owner's covered rentals, not one property at a time.

The main exceptions are an ownership interest last acquired before 7.30 pm Canberra time on 12 May 2026, counted from the contract and not settlement, and a dwelling that meets the legal tests for a new residential dwelling. Being new to its owner is not enough.

Other exceptions cover certain housing purposes set by legislative instrument and accommodation given as a fringe benefit, and complying super entities and widely held unit trusts are outside the limit.

Is this the same tax as when I sell?

No. A sale needs a capital gain or loss sum, which starts with the sale proceeds and the property's cost base, meaning its purchase cost and other eligible costs. The ATO's CGT guide sets it out.

The loan balance does not decide the gain.

The capital gains changes from 1 July 2027 apply to gains, including on property sales. They do not put the new treatment on annual rent. Only the separate negative gearing rules change how a yearly rental loss is treated.

For a sale, the contract date sets when the gain happens. Selling an investment property before or after work income ends covers the cash a sale leaves.

What should I check in my records?

• The agent's annual statement and any rent paid straight to you, before fees.
• Expense invoices and the dates of any private use, to separate deductions from private spending and improvements.
• Loan statements that split interest from principal, with evidence of what each borrowing or redraw paid for.
• The depreciation schedule and ownership papers. For the 2027-28 limit, the purchase contract's date and time can matter.

PropRetire's property tax and CGT estimates guide shows where these records go. When a required tax record is missing, the estimate is unavailable, not zero.