Investment Property Holding Costs

Every investor budgets for the purchase price. Fewer budget properly for what comes after. Holding costs directly impact your cash flow, and understanding them before you buy is what separates a deliberate investment strategy from a reactive one.

But there is a second layer most holding-cost breakdowns skip entirely. The ATO draws a hard line between holding costs you can deduct against rental income and holding costs you cannot. That distinction matters because costs that are not deductible can instead be added to your CGT cost base, reducing the capital gain when you eventually sell. Same expense, different tax treatment, depending on whether your property is tenanted or sitting vacant.

This article covers both sides: what you will pay each year to hold an investment property, and where each dollar lands in your tax position.

Every Holding Cost You Need to Budget For

Loan repayments

For most investors, loan repayments represent the largest portion of holding costs. The amount depends on your loan structure, interest rate, and whether you are paying interest-only or principal-and-interest. If you are weighing those options, the comparison in our interest-only vs principal-and-interest guide breaks down the cash flow trade-offs.

Council and water rates

Local government rates and water charges apply to most properties. These costs differ by location and property type but are generally predictable, which makes them easier to plan for. Some water charges may be recoverable from tenants depending on local legislation, easing cash flow in certain states.

Landlord insurance

Typical policies include landlord insurance, building insurance, and in some cases contents insurance for fixtures and fittings. These protect against tenant damage, loss of rent, and property damage. Our landlord insurance overview covers what to look for in a policy.

Property management fees

Property management fees usually cover tenant selection, inspections, rent collection, and maintenance coordination. Self-managing saves the fee but costs you time and requires familiarity with tenancy legislation in your state.

Strata levies

If you own a unit, townhouse, or apartment, strata levies will apply. These fees cover building insurance, common-area maintenance, and contributions to a sinking fund for future repairs. Levies vary based on property age, size, and amenities, so reviewing them before purchase is essential to avoid surprises.

Compliance and safety

Depending on property type and location, you may need to pay for smoke alarms, electrical assessments, gas inspections, and pool safety checks. These requirements vary by state, so check what applies to your property before settlement.

Preventative maintenance

Regular servicing of plumbing, gutters, HVAC systems, and roofs reduces the risk of costly emergency repairs. Budgeting for scheduled maintenance is cheaper than reacting to failures.

Vacancy periods

During vacancies, you cover every holding cost without rental income. Factoring occasional vacancies into your budget keeps the investment resilient. When assessing how much vacancy risk you carry, your rental yield calculation should account for realistic occupancy, not 52 weeks a year.

Deductible Costs vs Cost Base Costs: The Split That Matters

This is where most holding-cost articles stop. They list the expenses, maybe total them up, and move on. But the ATO treats these costs in two fundamentally different ways, and which treatment applies depends on your property's circumstances.

When your investment property is tenanted, holding costs like council rates, insurance premiums, repairs, and loan interest are generally deductible against your rental income. You claim them in the year you incur them, reducing your taxable income now. For the full list of what you can claim, see our investment property tax deductions guide.

The trade-off: costs you claim as a deduction cannot also be included in your CGT cost base. You get the tax benefit upfront, but those costs do nothing to reduce your capital gain at sale.

If the property is generating a net loss after deductions, that loss offsets other income through negative gearing. Our negative gearing worked example shows how that calculation flows through to your tax return.

Vacant Land and Pre-Tenancy: When Holding Costs Reduce Your Capital Gain Instead

The cost base of a CGT asset is generally what it cost you to buy it, plus other costs you incur to hold and dispose of it. The “costs of owning” element includes rates, land taxes, repairs, insurance premiums, and non-deductible interest on loans used to finance the asset.

The critical qualifier: these expenses can only be included in the cost base if they are not deductible. This is precisely the scenario that arises with vacant land. If you hold a block of land that produces no rental income, the holding costs are not deductible against any income. But they can be capitalised into your cost base.

Say you hold vacant land for three years before building and tenanting. Every dollar of rates, land tax, insurance, and loan interest paid during those three years goes into the cost base. When you eventually sell, those capitalised costs increase your cost base and reduce the taxable capital gain.

One limitation to note: the ATO states that you cannot index these costs or use them to work out a capital loss. These costs only help you when a gain exists to reduce.

Borrowing Costs and Capital Expenditure in Your Cost Base

Beyond ongoing holding costs, certain one-off expenses can also form part of the cost base. Borrowing expenses such as loan application fees and mortgage discharge fees are included, provided they have not already been claimed as deductions.

Capital expenditure to increase an asset's value can also be added to the cost base. A new kitchen or bathroom renovation that adds value falls here, provided it has not been depreciated or deducted elsewhere.

Using Depreciation to Offset Holding Costs

Depreciation does not eliminate holding costs, but it can reduce the effective cost of ownership. Engaging a qualified quantity surveyor can help maximise tax deductions and improve cash flow by identifying claimable items across your property. Our depreciation schedule guide covers what qualifies and how to get started.

Building a Realistic Holding Cost Budget

The common mistake is treating holding costs as something you calculate after settlement. By then you are committed. The better approach is to run the numbers before you make an offer, accounting for rate increases, extended vacancies, and unplanned maintenance.

A practical budget framework:

Understanding these costs before purchase, and knowing how each one interacts with your tax position, is what turns a property from a speculative buy into a calculated hold.

FAQ

What are holding costs on an investment property?

Holding costs are the ongoing expenses of owning an investment property beyond the purchase price. They include loan repayments, council and water rates, insurance, property management fees, maintenance, strata levies (for units), compliance costs, and vacancy periods. These costs directly impact your cash flow and need to be factored into your investment strategy from the outset.

Can I add holding costs to my CGT cost base?

Only if those costs are not tax-deductible. The ATO allows non-deductible holding costs to be included in the cost base, which reduces your capital gain at sale. This typically applies to vacant land or pre-tenancy periods where expenses like rates, insurance, and interest cannot be claimed against rental income.

What is the biggest holding cost for property investors?

Loan repayments are typically the largest single holding cost. The amount varies depending on your loan size, interest rate, and repayment structure (interest-only vs principal-and-interest). Other significant costs include insurance, council rates, and property management fees.

Are holding costs tax-deductible?

When your property is tenanted and producing rental income, most holding costs are deductible against that income. When the property is not producing income (such as vacant land), those same costs are not deductible but may instead be capitalised into your CGT cost base.