Investment property is one of the most tax-effective asset classes in Australia — but only if you claim correctly. The ATO has identified rental property deductions as a key area of non-compliance, with over $1.5 billion in adjustments made in recent years. This guide covers what you can claim, what you cannot, and what triggers an ATO audit.
Expenses You Can Claim Immediately
Immediately deductible expenses are those you can claim in full in the year they are incurred. These include interest on your investment loan (the single largest deduction for most investors), property management fees, council rates, water rates, landlord insurance, body corporate fees, advertising for tenants, pest control, and repairs that restore the property to its original condition.
Importantly, if the property is only available for rent part of the year, you must apportion your deductions accordingly. A holiday home that is rented for 30 weeks and used privately for 22 weeks can only claim 30/52 of its deductible expenses. The ATO requires you to keep detailed records of when the property was genuinely available for rent versus used privately.
Repairs vs Improvements
A repair restores something to its original condition and is immediately deductible. An improvement enhances the property beyond its original state and must be depreciated over time. Replacing a broken tap with a like-for-like tap is a repair. Replacing an entire kitchen is an improvement. The distinction matters significantly for your tax return.
- ✓Loan interest (investment portion only)
- ✓Property management and letting fees
- ✓Council rates and water charges
- ✓Landlord insurance premiums
- ✓Body corporate fees
- ✓Repairs and maintenance (not improvements)
- ✓Advertising for tenants
- ✓Travel to inspect property (limited)
- ✓Pest control and gardening
- ✓Legal expenses for tenant disputes
Depreciation and Capital Works Deductions
Depreciation allows you to claim the decline in value of the building structure (capital works, Division 43) and the plant and equipment within it (Division 40). Capital works deductions cover the construction cost of the building itself — typically claimed at 2.5% per year for 40 years for residential properties built after September 1987.
Plant and equipment covers items like carpets, blinds, hot water systems, air conditioning units, and appliances. However, since the 2017 budget changes, only investors who purchase brand-new plant and equipment can claim depreciation on those items. If you buy a second-hand property, you can only claim depreciation on items you install yourself — not on items left by the previous owner.
A quantity surveyor's depreciation schedule (costing $400–$700) is essential for maximising these deductions and is itself tax deductible.
Depreciation on New vs Second-Hand Properties
New properties offer far greater depreciation deductions than established ones. A new $600,000 apartment might generate $10,000–$15,000 in depreciation deductions in the first year, while a 30-year-old house might generate $3,000–$5,000. Factor this into your investment analysis.
Common Mistakes That Trigger ATO Audits
The ATO uses data matching — comparing your claims against rental income data from property managers, land title records, and bank interest reporting — to identify discrepancies. Common triggers include claiming interest on the owner-occupied portion of a loan, failing to apportion expenses when a property is used privately for part of the year, claiming initial repair costs as immediate deductions (rather than capital improvements), and claiming excessive or unsupported travel deductions.
Since 1 July 2017, travel expenses to inspect, maintain, or collect rent from a residential investment property are no longer deductible for most individual investors. Only taxpayers who carry on a property investment business (not merely holding investment properties) can still claim travel.
Keep every receipt, every bank statement, and every property management report for a minimum of five years. The ATO can audit returns for up to four years (or longer if fraud is suspected).
- ✓Claiming interest on owner-occupied portion of loan
- ✓Not apportioning expenses for private use periods
- ✓Treating capital improvements as immediate repairs
- ✓Claiming travel expenses (restricted since July 2017)
- ✓Failing to report all rental income
- ✓Claiming depreciation on second-hand plant and equipment
Frequently Asked Questions
About the Author
Sakib Manzoor
Senior Finance Wellness Expert
Sakib Manzoor is the founder of Secure Finance and brings extensive experience in Australian mortgage broking and financial wellness. Specialising in helping clients achieve their property finance goals through personalised strategies and expert guidance, Sakib is FBAA accredited and committed to providing clear, actionable advice. All content is written to meet Australian regulatory standards and is regularly updated to reflect current market conditions.