Australian Investor’s Guide to Rental Property Renovations: ROI, Tax Deductions, and The ATO Rules

Renovating a rental property sounds straightforward until you’re staring at a $15,000 invoice wondering which bits you can claim this year, which bits take 40 years to write off, and whether you’ve just overcapitalised in a flat market.

This guide cuts through the confusion. You’ll learn exactly what the ATO lets you claim immediately versus what gets depreciated, how to calculate whether a renovation actually pays for itself, and the capital gains strategies that could save you tens of thousands when you sell.

Here’s the answer most investors need: you cannot claim all renovation costs immediately. The ATO draws a firm line between repairs and capital works, and getting it wrong triggers audits.

Repairs restore something to its original condition. They’re 100% deductible in the year you pay for them. Capital works improve or replace something, and you depreciate these at 2.5% per year over 40 years.

The distinction matters enormously. Replacing a broken tap? Repair, claim it now. Replacing the entire bathroom? Capital works, you’ll claim $625 per year on a $25,000 bathroom for the next four decades.

Work through this for any renovation expense:

Step 1: Is the work restoring something to its original condition without improvement?

• Yes → It’s a repair. Claim 100% this financial year.
• No → Continue to Step 2.

Step 2: Is the item removable or a standalone asset (oven, carpet, air conditioner, blinds)?

• Yes → It’s plant and equipment. Depreciate over the item’s effective life (typically 5-15 years depending on the asset).
• No → Continue to Step 3.

Step 3: Is the work structural or a permanent fixture (new kitchen, bathroom, walls, flooring)?

• Yes → It’s capital works. Depreciate at 2.5% per year over 40 years.

The $300 Immediate Write-Off: Assets costing $300 or less can be claimed immediately in full. A $280 ceiling fan? Write it off this year. A $350 ceiling fan? Depreciate it over its effective life.

The Instant Asset Write-Off Myth: You’ve probably heard about the instant asset write-off threshold (currently $20,000 for small businesses). Here’s what most articles won’t tell you: this generally doesn’t apply to passive rental property investors. It’s designed for businesses, not investment properties earning rental income. Claiming it incorrectly is a red flag for ATO review.

Important: “Like-for-like” replacement of a capital item is still capital works, not a repair. Replacing a functional kitchen with another kitchen of similar value? Still capital works. The ATO looks at what you’re doing, not just what you’re spending.

A renovation only makes financial sense if you get more back than you put in. The rough benchmark: for every $1.00 spent, you should add at least $2.00 in equity or generate enough rental increase to hit a 10-15% annual return on your renovation costs.

Anything less and you’re overcapitalising, spending money that won’t come back to you at sale or through higher rent.

Here’s how to calculate whether a renovation stacks up:

(New Annual Rent − Old Annual Rent) ÷ Total Renovation Cost × 100 = ROI %

Example: Your property currently rents for $450/week ($23,400/year). You spend $8,000 on renovations and increase rent to $500/week ($26,000/year).
($26,000 − $23,400) ÷ $8,000 × 100 = 32.5% ROI

That’s a strong result. Your renovation pays for itself in about three years through increased rent alone, before you factor in the equity gain at sale.

Target benchmark: Aim for minimum 10-15% annual return on renovation costs through rent increases. Below 10% and you’re likely better off investing the money elsewhere.

Not all renovations deliver equal returns, some can actually add real value. Here’s what the numbers show for typical Australian properties:

Based on current rental market conditions and construction costs:

1. Split-system air conditioning — $2,500-$4,000 installed. Adds $10-20/week to rent in most markets, depreciates as plant and equipment, and significantly broadens your tenant pool. In Queensland and northern NSW, properties without aircon struggle to let.
2. Fresh paint and new carpet — $6,000-$10,000 combined. The fastest way to make a tired property feel new. Rent increase of $20-40/week is common, and you’ll attract better quality tenants who stay longer.
3. Kitchen facelift (not full replacement) — $5,000-$12,000. New cabinet doors, modern handles, stone benchtop overlay, and updated splashback. Delivers 80% of the visual impact of a new kitchen at 30% of typical kitchen renovation costs.
4. Bathroom renovations or refresh — $8,000-$15,000. New vanity, mirror, tapware, and re-grouting or painting tiles. Full re-tiling if the existing tiles are damaged. Tenants judge properties heavily on bathroom condition.
5. Outdoor living area — $3,000-$8,000. A basic deck or paved entertaining area extends the living space without building costs. Particularly effective in lifestyle suburbs and family rental markets.

You’ll see various “rules of thumb” thrown around in property investment circles. Here’s what they actually mean and whether they’re useful in today’s Australian market.

Definition: Monthly rent should equal 2% of the purchase price.

Example: A $500,000 property should rent for $10,000/month ($2,300/week) to meet the 2% rule.

Reality check: This rule comes from American markets and is almost impossible to achieve in Australian capital cities. A $500,000 property in Sydney or Melbourne renting for $2,300/week? Not happening. Even in regional areas, hitting 2% is rare.

Usefulness: Limited in Australia. It’s a theoretical benchmark that almost no property meets. Don’t dismiss a property just because it fails the 2% test.

Definition: Monthly rent should equal 1% of the purchase price.

Example: A $500,000 property should rent for $5,000/month ($1,150/week).

Reality check: More achievable than the 2% rule but still challenging in Sydney, Melbourne, and increasingly Brisbane. Regional centres and outer suburban areas sometimes hit this benchmark.

Usefulness: Reasonable as a quick screening tool for cashflow-focused investors.

This is context-dependent. A 4.5% gross yield needs to be assessed against:

Current interest rates: If your mortgage rate is 6.5%, a 4.5% yield means you’re negatively geared—rental income doesn’t cover interest costs. You’re relying on capital growth and tax deductions.

Location growth prospects: A 4.5% yield in a high-growth area (inner-city Brisbane, parts of Perth) might outperform a 6% yield in a stagnant regional market when you factor in capital appreciation.

Your investment strategy: Cashflow investors need higher yields. Growth investors accept lower yields for capital appreciation potential.

Rough benchmarks for 2026:

• Below 4%: Low yield, growth-dependent strategy
• 4-5%: Average yield for capital city properties
• 5-6%: Above average, good cashflow potential
• Above 6%: High yield, check why (regional, lower growth prospects, or genuine opportunity)

Definition: Rent shouldn’t exceed 30% of the tenant’s gross income.

Why it matters: This isn’t about your returns—it’s about tenant quality and reliability. Tenants paying more than 30% of their income in rent are statistically more likely to fall behind on payments or break leases early.

Application: When setting rent, consider who your target tenant is. If you’re aiming at a couple earning $120,000 combined, the 30% threshold is $36,000/year or $690/week. Price above that and you’re either attracting stretched tenants or limiting your applicant pool.

Capital Gains Tax can take a significant bite out of your profit when you sell. Understanding the 6-year rule and CGT discount could save you tens of thousands.

If you lived in a property as your main residence before renting it out, you can treat it as your main residence for CGT purposes for up to six years while it’s rented—even though you’ve moved out.

The requirements:

• The property must have been your genuine main residence at some point
• You must not claim any other property as your main residence during this period
• The absence must be six years or less (the clock resets if you move back in)

What this means: If you lived in a property, moved out, rented it for five years, then sold—you could potentially pay zero CGT on the entire gain, provided you didn’t nominate another main residence during that time.

Question 1: Did you ever live in this property as your main residence?

• No → The 6-year rule doesn’t apply. CGT payable on the full gain (less any applicable discount).
• Yes → Continue.

Question 2: Have you been renting it out for six years or less?

• No (more than six years) → Partial exemption only. You’ll pay CGT on the portion of the gain after the six-year period.
• Yes → Continue.

Question 3: Have you claimed another property as your main residence during this period?

• Yes → The 6-year rule doesn’t apply. You can only have one main residence at a time for CGT purposes.
• No → You may be fully CGT exempt. Consult your accountant to confirm eligibility.

When you do pay CGT, here’s how it works:

Step 1: Calculate your capital gain (sale price minus purchase price and costs).

Step 2: If you held the property for more than 12 months, apply the 50% CGT discount. You only pay tax on half the gain.

Step 3: Add the remaining gain to your taxable income for the year. You pay CGT at your marginal tax rate.

Example: You sell an investment property for $700,000 that you bought for $500,000 five years ago. Your costs (stamp duty, legal fees, selling costs) total $40,000.

• Capital gain: $700,000 − $500,000 − $40,000 = $160,000
• 50% CGT discount (held >12 months): $160,000 × 50% = $80,000 assessable
• If your marginal tax rate is 37%: $80,000 × 37% = $29,600 CGT payable

Without the 50% discount, you’d pay $59,200. Holding for over 12 months saved you nearly $30,000.

Timing your sale: If you’re selling late in the financial year and have had high income, consider whether settling in July (next financial year) could reduce your CGT by keeping your total taxable income in a lower bracket.

Renovation timing: Major renovations completed shortly before sale add to your cost base, reducing your capital gain. Keep detailed records and receipts.

The 6-year clock: If you’re approaching six years of renting out a former main residence, you have options. Move back in for a genuine period (not a token stay—the ATO scrutinises this) and the clock resets. Or accept the partial exemption and plan your tax accordingly.

Before committing to any rental property renovation, run through these questions:

1. Will it increase rent by enough to justify the cost? Calculate the ROI using the formula above. Below 10% annual return, reconsider.
2. Will it add more equity than it costs? Research comparable sales in your area. If your $20,000 kitchen won’t add at least $20,000 to the property’s value, it’s overcapitalisation and one of the most common mistakes to avoid when renovating.
3. How will I claim it? Know before you spend whether you’re looking at an immediate deduction, plant and equipment depreciation, or 40-year capital works. This affects your cashflow modelling.
4. Does it make sense for my target tenant? A luxury kitchen renovation in a student rental area is wasted money. Match your renovation to your tenant demographic.
5. What’s my exit timeline? If you’re selling within two years, prioritise cosmetic improvements that photograph well. If you’re holding long-term, invest in quality that reduces maintenance costs.

The best renovations hit multiple criteria: they increase rent, add equity, offer reasonable tax treatment, and suit your tenant market. When those factors align, you’ve found a renovation worth doing.

Getting the renovation right matters, for your rental returns, your tax position, and your eventual sale price. Jonathan Homes specialises in property renovations that maximise value without overcapitalising, whether you’re updating a tired kitchen, refreshing a bathroom, or completing a full property transformation.

With experience across investor-focused renovations, the team understands what tenants want, what adds genuine value, and how to deliver quality work that stands up to rental wear and tear.

Get a quote for your rental property renovation or call to discuss your project with the Jonathan Homes team.