Rental property deductions: what you can claim, and what the ATO looks at

Rental properties are one of the areas the ATO reviews most closely, because the rules are detailed and mistakes are common. Getting the claims right protects your refund and keeps you out of trouble if your return is ever reviewed.

Expenses you can generally claim in the year you pay them

When a property is rented, or genuinely available for rent at market rates, you can usually claim the costs of earning that rent, including:

• Interest on the loan used to buy the property
• Council rates, water charges and land tax
• Landlord insurance and strata levies
• Property management fees and advertising for tenants
• Repairs and maintenance that fix damage or wear from renting
• Pest control, gardening and cleaning between tenants

Interest: only the portion used for the property

Interest is deductible only on the part of the loan used to buy or improve the rental. If you redraw from the loan to pay for a car or holiday, the interest on that portion is not deductible. Mixing purposes in one loan is a frequent source of errors, so keep a clear record of every redraw.

Repairs, improvements and initial repairs

This is where many claims go wrong.

• Repairs restore something to its previous condition, such as fixing a broken window or replacing part of a damaged fence. These are usually deductible straight away.
• Improvements make something better than it was, such as renovating a kitchen. These are capital works, claimed over time rather than immediately.
• Initial repairs fix defects that existed when you bought the property. Even though they look like repairs, they are treated as part of the cost of the property, not an immediate deduction.

Depreciation and capital works

Buildings and structural improvements can generally be claimed over many years as capital works deductions. Items such as appliances, carpets and blinds are depreciating assets with their own effective lives.

For residential properties bought after 9 May 2017, you generally cannot claim depreciation on previously used assets that came with the property. A depreciation schedule prepared by a qualified quantity surveyor is the most reliable way to work out what you can claim.

Things you usually cannot claim

• Travel to inspect or maintain a residential rental property, for most individual investors
• Costs for periods when the property was used privately by you, family or friends
• Expenses where the property was rented to family below market rent, beyond the rent received
• Stamp duty and legal costs of purchase, which form part of the cost base for capital gains tax instead

Records to keep

Keep your property manager's annual statement, loan statements, invoices for every repair, your depreciation schedule, and the purchase contract and settlement statement. Hold on to purchase and improvement records until five years after you sell, because they determine your capital gain.

If you own one property or several, we can prepare your rental schedules and review your claims as part of your individual tax return.