Rental deductions under the microscope: claim everything you're owed, safely (2025-26)

The ATO has put rental properties near the top of its watch-list, and the headline number is confronting: in its Random Enquiry Program, 9 out of 10 tax returns reporting rental income and deductions contained at least one error — even most of those prepared by a registered tax agent. It’s easy to read that as “claim less and keep your head down.” That’s the wrong lesson.

The real story is that landlords lose money in two directions. Many miss thousands in legitimate deductions they’re fully entitled to — depreciation, capital works, borrowing costs. Others misclassify a repair as an improvement, or over-claim interest — the exact mistakes that put them under the microscope. Get both sides right and you get a bigger refund and a return that holds up. Here’s the whole picture, plainly.

What you can actually claim

Think of your rental costs in three buckets.

Deductible this year (in the income year you incur them), while the property is rented or genuinely available to rent:

Loan interest (see the traps below)
Council rates, land tax, water and other rates
Insurance (building, landlord, contents)
Property-agent management fees and commissions
Advertising for tenants
Repairs and maintenance (see the line below)
Cleaning, gardening, pest control
Body-corporate / strata administration fees
Phone, internet and stationery — the portion used to manage the tenancy

Deductible over several years: capital works (the building), depreciating assets (the fittings), and borrowing expenses over $100 — all covered below.

Not deductible: the purchase price of the property itself, conveyancing and stamp duty (these go into your CGT cost base for when you sell), any private-use portion, and — for most individual investors since 1 July 2017 — travel to inspect or maintain a residential rental.

Repairs vs improvements: the timing trap that costs the most

This one distinction moves more money than any other, because it changes when you get the deduction.

A repair or maintenance puts something back to its original condition after wear and tear that happened while you were renting it out — a leaking tap, a cracked window pane, repainting a scuffed wall. This is fully deductible in the year you pay it.
An improvement makes something better than it was, or replaces a whole separately identifiable item — a new kitchen, an extension, a re-clad roof. This is capital works, deducted at 2.5% per year over 40 years — so a $20,000 renovation gives you roughly $500 a year, not a $20,000 hit this year.

Two traps inside this:

Initial repairs. Fixing a defect that already existed when you bought the property — a tired kitchen, a fence that was already broken — is not an immediate deduction, even though it looks like a repair. It’s capital.
“Replacing the whole thing.” Mending a fence is a repair; replacing the entire fence is usually capital. The test is whether you restored a part, or renewed the entirety of a separate item.

Capital works deductions on the building apply to residential construction completed after 17 July 1985; structural improvements made after that date qualify too.

Loan interest — and the redraw trap that catches thousands

About 80% of rental owners claim loan interest, and the ATO says it’s “where we’re seeing the biggest mistakes.” The rule itself is simple: interest is deductible to the extent the borrowed money is actually used to buy or hold the income-producing property. Two things trip people up.

Refinancing is fine. If you refinance the investment loan, the new loan takes on the character of the old one — the deduction carries over. Refinancing alone doesn’t break the link to your rental income.
Redraw for private use is not fine. This is the big one. If you redraw from the loan to pay for something private — a car, a holiday, your own home — the interest on that portion is no longer deductible, even if you’re ahead on repayments. The loan becomes “mixed purpose” and you must apportion the interest between the rental part and the private part, every year. Redraw is the single most common way a clean interest deduction quietly turns into an over-claim.

Separately, borrowing expenses — the costs of setting up the loan (loan establishment fees, lender’s mortgage insurance, title search and mortgage stamp duty on the loan) — are spread over 5 years or the term of the loan, whichever is shorter. If they total $100 or less, you can claim them in full this year.

Depreciation: the deduction most landlords never claim

This is the “found money” side of the ledger. There are two separate streams, and confusing them is common.

Capital works (Division 43) — the building and structure itself, deducted at 2.5% per year. Unaffected by the 2017 changes below.
Depreciating assets / plant and equipment (Division 40) — the removable fittings: carpet, blinds, the oven, dishwasher, air-conditioner, hot-water system. These decline in value over their effective life.

The catch every investor needs to know: the second-hand rule. From 7:30pm AEST on 9 May 2017, most investors can no longer claim the decline in value of previously used (second-hand) plant and equipment in a residential rental. So the existing carpet and oven in an established home you buy today generally give you no Division 40 deduction.

What you can still claim:

Brand-new assets you buy and install yourself (new dishwasher, new air-con)
Assets in a property you contracted to buy before 9 May 2017
Properties used for commercial (non-residential) purposes
Claims by excluded entities such as companies

And crucially, the building itself (capital works) is untouched by the 2017 rule — that 2.5% keeps flowing. The tool that unlocks all of this is a quantity surveyor’s depreciation schedule; on a newer property it can surface thousands of dollars a year in deductions owners never think to claim — and the cost of the schedule is itself deductible.

What actually triggers a review — and how to stay off the microscope

The ATO isn’t guessing. It data-matches banks, property managers, land-title offices and short-term letting platforms. The patterns that draw attention:

Claiming 100% of the interest when part of the loan has been redrawn for private use — apportion it.
Dressing up an improvement as a repair to get the instant deduction.
Deductions that don’t match the income — claiming a full year when the property was only available part of the year.
Holiday homes claimed at full rate when you, family or friends used them privately — apportion for private use.
Undeclared short-term letting income from Airbnb or Stayz — the ATO receives this data directly.

None of this means claiming less than you’re owed. It means claiming it cleanly: keep every receipt, split each expense by your legal ownership share, apportion any private use honestly, and get a depreciation schedule so your biggest legitimate deductions are properly documented.

The bottom line

“Under the microscope” doesn’t mean “claim less.” It means claim precisely. The landlords who do best are the ones who capture every legitimate deduction — interest, repairs, capital works, depreciation — and classify each one correctly, so a bigger refund is also an audit-proof one. If you’re not sure which bucket a cost falls into, that’s exactly the question worth asking before you lodge — a five-minute check can be worth thousands, in either direction.

General information only, current as at July 2026 for the 2025-26 income year. Rental deductibility depends on your circumstances — how the property is financed, used, and owned — and figures, thresholds and rules can change. The second-hand depreciating asset rules apply from 9 May 2017; travel-expense limits from 1 July 2017. Confirm the current-year detail for your own facts before you lodge.

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