Finance & Tax
Maximising your legitimate tax deductions is one of the most effective ways to improve the financial performance of your rental property. The ATO allows a wide range of deductions for investment properties, but many landlords miss out because they do not know what they can claim or fail to keep adequate records. This comprehensive checklist covers everything you need to know.
These expenses can be claimed in full in the income year they are incurred. They cover the day-to-day costs of owning and managing a rental property.
Capital works deductions allow you to claim the construction cost of the building over time. For residential properties built after 15 September 1987, you can claim 2.5% of the original construction cost per year for 40 years. This applies to the building structure itself, including walls, roof, floors, doors, windows, and fixed structures like garages, carports, and fences.
For example, if your property was built in 2005 at a construction cost of $250,000 (excluding land), you can claim $6,250 per year in capital works deductions. This is a non-cash deduction, meaning you claim it without spending any money in the current year, which makes it extremely valuable for reducing taxable income.
Renovations and structural improvements are also claimable under Division 43. If you renovate a bathroom for $15,000, you can claim $375 per year (2.5%) for 40 years. You need a quantity surveyor's report to substantiate these claims.
Plant and equipment items, meaning removable or mechanical assets within the property, can be depreciated over their effective life as determined by the ATO. Common depreciable items include carpets and floor coverings (effective life 10 years), blinds and curtains (5 years), hot water systems (12 years), ovens and cooktops (12 years), air conditioning units (10 years), dishwashers (10 years), rangehoods (10 years), light fittings (5 years), and smoke alarms (7 years).
Important change: since 1 July 2017, the rules changed for second-hand plant and equipment in residential properties. Under the Treasury Laws Amendment (Housing Tax Integrity) Act 2017, if you purchased a second-hand residential property after 9 May 2017, you can only claim Division 40 depreciation on plant and equipment assets that you purchased and installed new. You cannot claim depreciation on items already in the property when you bought it. However, when you eventually sell, the unclaimed depreciation is added to your cost base for CGT purposes.
This change does not affect properties purchased before 9 May 2017, newly constructed properties, or items you install new in an existing property.
Since 1 July 2017, residential property investors can no longer claim travel expenses incurred in connection with a residential rental property. This includes travel to inspect the property, collect rent, maintain the property, or attend to tenant matters. This change was introduced by the same 2017 housing tax integrity legislation.
The travel deduction restriction applies regardless of whether you manage the property yourself or use a property manager. However, it does not apply to commercial or industrial rental properties, and it does not apply if you are carrying on a business of providing rental properties (as opposed to simply being a passive investor).
The ATO requires you to keep records of all rental income and expenses for five years from the date you lodge your tax return. Acceptable records include bank and financial institution statements, receipts, invoices, rental statements from your property manager or platform, loan statements showing interest paid, insurance policies and premium notices, council rate notices, depreciation schedules, and records of any capital works or improvements.
Digital records are acceptable. The ATO's myDeductions tool within the ATO app allows you to photograph and store receipts throughout the year. Abode also provides a complete financial record of all rent collected and management fees deducted, which can be exported for your tax return.
Rental property deductions are one of the ATO's top audit targets. The most common mistakes that attract scrutiny include claiming the property is available for rent when it is being used personally or by family, overclaiming interest by including the principal component of loan repayments, claiming improvements as repairs (replacing an entire kitchen is an improvement, not a repair), failing to apportion expenses when the property is only available for part of the year, claiming travel expenses (no longer allowable since 2017), and not declaring all rental income, including bond money retained at the end of a tenancy.
The ATO uses sophisticated data matching to cross-reference your claims against information provided by banks, insurers, strata managers, and real estate platforms. Ensure your claims are accurate, substantiated, and consistent with the information these third parties report.