Preparing a rental property tax return is not simply a matter of adding up expenses paid during the year. Some costs may be deductible immediately, others need to be claimed over several years, and certain expenses cannot be claimed as deductions at all.
That distinction is particularly important when reviewing a 2025–26 rental property return. Interest, repairs, strata costs, borrowing expenses and depreciation can all receive different tax treatment depending on how the expense arose and how the property was used.
The ATO’s rental property guidance separates expenses into three broad categories: deductions that may be claimed in the year incurred, expenses claimed over several years, and expenses that are not deductible.
Before assuming an expense has been missed, investors therefore need to determine which category it actually belongs in.
Interest Deductions Can Be More Complicated Than the Mortgage Statement
Interest on money borrowed to purchase a rental property can generally be deductible where the borrowing relates to producing rental income and the property is rented or genuinely available for rent.
The common problem appears when the same loan is later used for private purposes.
For example, an investor might redraw money from an investment loan to pay for a private expense or refinance the loan and use part of the additional borrowing elsewhere. Under ATO guidance, the interest relating to the private portion needs to be separated from the income-producing portion.
This means investors should look beyond the annual interest figure supplied by the lender.
- Check what the borrowed funds were actually used for. The security attached to the loan does not by itself determine deductibility. The use of the borrowed money matters.
- Review redraws and refinancing. Private withdrawals can create an ongoing need to apportion interest rather than claiming the entire amount.
- Keep loan records. Mixed-purpose loans can become difficult to reconstruct several years later if the transaction history is incomplete.
Interest may be one of the largest rental deductions, which makes accurate apportionment particularly important.
Do Not Overlook Borrowing Expenses
Interest is not the only finance-related cost associated with an investment loan. Certain borrowing expenses may also be deductible over time rather than immediately. These can include eligible costs incurred in establishing the loan.
This distinction is easy to miss because borrowing expenses may occur only when the property is purchased or the finance arrangement changes. They can therefore disappear from attention after the first year of ownership. Investors should review their loan establishment records rather than relying only on recurring expenses appearing in the current year’s bank transactions.
The appropriate treatment and period over which eligible borrowing expenses are claimed depend on the applicable tax rules, so these costs should be identified separately from interest and property acquisition costs.
Repairs and Improvements are Not the Same Thing
Repairs are one of the areas most likely to confuse. A genuine repair or maintenance expense incurred while earning rental income may be deductible immediately. However, replacing an entire asset, substantially improving the property or fixing defects that existed when the property was acquired can receive different treatment.
Expense | Possible Tax Treatment | Common Issue |
Routine repair or maintenance | May be immediately deductible | Work must genuinely be a repair or maintenance expense connected with earning rental income |
Initial repair after purchase | Generally not an immediate repair deduction | The defect or deterioration may have existed when the property was acquired |
Structural improvement | May qualify as capital works | The expenditure improves or changes the property rather than simply restoring it |
Separate depreciating asset | Decline in value may be available where the rules allow | Residential properties have restrictions for certain second-hand assets |
The invoice description alone does not decide the treatment. What work was actually performed matters.
Capital Works Can Be Easy to Forget
Renovations and structural improvements may not provide an immediate deduction, but that does not necessarily mean there is no tax deduction available.
Eligible construction expenditure can potentially be claimed through capital works deductions. The ATO states that the deduction rate for relevant capital works is generally 2.5% per year for 40 years, although the applicable treatment depends on the construction expenditure and circumstances.
Capital works can include qualifying expenditure on items such as building construction, structural alterations, major renovations and certain improvements.
This is particularly easy to overlook when an investor purchases an older property where qualifying construction expenditure was incurred by a previous owner.
A quantity surveyor may be able to help establish eligible construction costs where sufficient original information is unavailable. The cost of preparing a tax depreciation schedule can itself have relevant tax treatment and should be discussed with the investor’s tax adviser.
Depreciating Assets Need Separate Attention
Not everything inside a rental property forms part of the building. Certain assets may be depreciating assets, allowing eligible investors to claim a deduction for their decline in value over time. Examples can include particular appliances or other separately identifiable assets. However, residential property investors need to be especially careful with second-hand assets.
The ATO restricts deductions for the decline in value of certain second-hand depreciating assets in residential rental properties. The restrictions generally apply to assets acquired with an established property after the relevant legislative changes, subject to exceptions.
That means buying a property containing an existing dishwasher, air conditioner or other asset does not automatically mean the new owner can claim depreciation on it. New assets purchased by the investor can have different treatment.
Body Corporate Costs Should Be Separated Properly
Strata investors may pay regular body corporate or owners corporation charges, but these amounts should not automatically be grouped and claimed in the same way. Regular administrative charges connected with the ongoing management of the property can have different treatment from amounts raised to fund substantial capital works.
For example, a special levy used for major structural improvements may need to be considered differently from routine strata administration expenses. Investors should therefore retain body corporate notices and information explaining what a levy was used for rather than relying only on the amount shown on the bank statement. A property tax accountant can help review how property income and expenditure have been classified and identify items that need closer tax consideration.
Good Records Make Property Deductions Easier to Find
Missing deductions are often a record-keeping problem rather than a tax-rule problem. If loan documents, strata notices, property-management statements, renovation invoices and asset purchases are stored separately, the person preparing the tax return may not have the information needed to classify each expense correctly. A useful annual property file should bring together finance costs, rental statements, council and strata charges, insurance, repairs, capital expenditure and records of new assets. For a broader look at how these records fit into property financial management, see accounting for property made simple.
Review Before the Tax Return is Finalised
The aim should not be to claim every property expense as a deduction. It should be to make sure eligible costs are not overlooked while capital, private, and non-deductible expenditure is treated correctly.
This is where organised accounting records make tax preparation considerably easier. Where property portfolios or transaction volumes increase, using an outsourced tax return preparation model can provide additional support with preparing and organising the financial information required for tax work. The final tax treatment still depends on the investor’s circumstances, ownership structure, property use and the nature of each expense.
Wrapping Up
Property investors can easily focus on obvious expenses such as mortgage interest and property-management fees while overlooking borrowing costs, capital works, eligible depreciation or smaller operating expenses.
At the same time, claiming too broadly creates its own risk. Repairs and improvements need to be distinguished, mixed-purpose borrowing may require apportionment, and residential depreciation rules limit claims for certain second-hand assets.
If you need help organising rental income, property expenses and tax records before preparing your return, Befree can support the accounting and tax preparation process. Contact Befree to discuss how structured property accounting and tax support can help keep your investment records accurate and ready for review.