The ATO’s own auditing has found that around 9 in 10 rental property owners make an error in their tax return. Rental properties have been a stated compliance focus for several years running, and the ATO now receives data from property managers, land title offices, banks and insurers.
The good news is that the errors cluster around a handful of predictable issues. Here are the ones that cause the most trouble.
1. Loan interest — the single biggest error
About 80% of taxpayers with rental income claim a deduction for loan interest, and it is where the ATO sees the largest mistakes.
You can only claim interest on the portion of the loan used to produce rental income. If you redrew against the loan to buy a car, pay for a holiday or renovate your own home, that portion is private and the interest on it is not deductible.
This trips up a lot of people who redraw for something personal years after buying the property. The loan is still “the investment loan” in their mind, but the ATO apportions it by use, not by name.
2. Repairs versus improvements
This is a genuine technical distinction, not a formality:
- Repairs and maintenance — restoring something to its original condition. Immediately deductible. Fixing a leaking tap, replacing a few broken roof tiles, repainting a worn wall.
- Capital improvements — making something better than it was. Not immediately deductible; claimed over time as capital works. A new kitchen, an extension, replacing the whole roof with a better material.
- Initial repairs — fixing damage, defects or deterioration that existed when you bought the property. Not deductible as a repair, even if you do the work the week you settle. Depending on the nature of the work it may instead be claimable over a number of years as capital works, or form part of the cost base for CGT.
The ATO has specifically flagged claims that appear inflated to offset rising rental income. Getting a large “repair” reclassified as capital during an audit is an expensive surprise.
3. Declaring net rent instead of gross
Rental income must be declared as the gross amount received, before your property manager deducts their fees and pays expenses on your behalf. It must also be declared in the year the tenant pays, not the year your agent transfers it to you.
The ATO regularly sees owners declare the net figure from their agent statement and then also claim deductions for the rates and repairs the agent already netted off. That is claiming the same expense twice, and the data the ATO receives from property managers makes it easy to spot.
Insurance payouts and retained bond money are rental income too.
4. Apportioning for private use and part-year rental
If the property was not genuinely available for rent for the full year, your deductions must be apportioned. Common triggers:
- You or family stayed in the holiday home for part of the year
- The property was advertised at an unrealistic rent, or with conditions that discouraged tenants
- The property was vacant while you renovated it for your own use
- It was only listed part-way through the income year
5. Missing the depreciation you are entitled to
Errors run both ways. Plenty of owners overclaim, but many also miss legitimate deductions:
- Capital works (Division 43) — the building structure, typically at 2.5% a year for 40 years for eligible properties
- Plant and equipment (Division 40) — ovens, air conditioners, carpets, blinds, hot water systems
- Borrowing costs — loan establishment fees, mortgage stamp duty and lender’s mortgage insurance, deductible over five years or the loan term, whichever is shorter
A quantity surveyor’s depreciation schedule usually pays for itself in the first year on anything built or substantially renovated in recent decades.
6. Forgetting that CGT starts on day one
The records you keep now determine your capital gains tax bill when you sell. Keep purchase contracts, stamp duty, legal fees, agent commissions, and every capital improvement receipt — indefinitely, not for five years.
If the property was ever your main residence, or you moved out and rented it, the six-year absence rule and partial main residence exemption can dramatically change the outcome. These need to be worked out properly, not guessed at.
What good records look like
- Annual statement from your property manager
- Loan statements showing interest, and a written record of what any redraw was used for
- Every invoice for repairs, with a note of what was actually done
- A depreciation schedule from a quantity surveyor
- Council rates, water, insurance, body corporate and land tax notices
- A dated record of any period the property was not available for rent, and why
Need a hand with this?
We prepare rental schedules for investors across Melbourne and around Australia, including multi-property portfolios and properties that have moved in and out of being a main residence. If you have had a redraw, a renovation or a period of private use, it is worth a conversation before we lodge.
Related reading
- Working from home deductions 2025–26: the 70 cent rate explained
- Car and travel claims: 88 cents a kilometre, and the trips you can’t claim
- Crypto and the ATO: what data matching means for your tax return
- Our full range of services, including rental property and capital gains tax
Sources
- ATO – Rental properties guide 2026
- ATO – How to claim rental expenses
- ATO – Get your rental right this tax time
This article is general information only and does not take your personal circumstances into account. Rates and thresholds are current for the 2025–26 income year unless stated otherwise. Speak to us before acting on anything you read here.
Samrat Sharma & Associates 