Owning a rental property can be a great way to build wealth. But when tax time rolls around, things can get tricky. Are you sure you’re not overpaying? Missing deductions? Making mistakes that could cost you thousands?
Every year, property investors leave money on the table—or worse, attract the ATO’s attention—because they don’t fully understand how rental property tax works. But, with the right knowledge, you can avoid these common traps.
Let’s break down the ten biggest tax mistakes property owners make and how you can avoid them.
Treating Initial Repairs as an Immediate Deduction
Picture this: you buy a rental property, and it needs some fixing. Maybe the walls need repainting, or the carpet is damaged. Naturally, you get the repairs done straight away. But can you claim them as an immediate tax deduction? Not necessarily.
The ATO classifies repairs made before renting the property as capital improvements, meaning you can’t deduct them right away. Instead, you claim them over time as capital works deductions. If you get this wrong, you risk over-claiming—and that’s a red flag for the tax office.
Miscalculating Loan Interest Deductions
Did you get a loan for your rental property? You can claim interest, but only on the portion used strictly for the rental.
If you’ve dipped into the same loan for a holiday or a new car, you can’t claim interest on that part. Even if you repay the personal portion, the ATO still considers the loan “mixed,” and you must apportion interest correctly. Getting this wrong could mean penalties or lost deductions.
Forgetting to Claim Borrowing Expenses
Did you pay loan establishment fees, mortgage document costs, or title search fees? These are borrowing expenses, and you can claim them.
But here’s the catch: if they’re over $100, you have to spread the deduction over five years. If they’re under $100, you can claim the full amount in the same year. It is a small but valuable deduction that many property owners forget.
Claiming Purchase Costs as Immediate Deductions
Yes, buying a property is expensive. But no, you can’t deduct purchase costs like conveyancing fees or stamp duty (except in the ACT). These are factored into your cost base for capital gains tax (CGT) purposes when you sell.
If you’ve been mistakenly claiming them as rental expenses, you might be in for a nasty surprise if the ATO reviews your return.
Misunderstanding Capital Works Deductions
Major structural improvements—such as extensions, new flooring, or complete kitchen renovations—fall under capital works and must be claimed over time. The deduction rate is 2.5% per year for 40 years from the completion date.
Some investors mistakenly treat these improvements as immediate deductions, leading to incorrect tax returns. Understanding what qualifies as capital works can prevent costly errors and help you maximise deductions legally.
Treating All Body Corporate Fees as Deductible
Owning a strata property means paying body corporate fees, but not all of these payments are immediately deductible.
Standard administration fees? Fully deductible. Contributions to a special purpose fund for major renovations? Not deductible upfront. Instead, they are treated as capital works and must be claimed over time. Many investors assume all body corporate payments are the same, but failing to distinguish between them can lead to incorrect tax claims.
Splitting Rental Income and Expenses Incorrectly
Co-owning a rental property with a partner or friend means rental income and expenses must be reported according to ownership percentage. A 60/40 ownership split means exactly that—60% of income and expenses to one owner and 40% to the other.
Some investors try to allocate more expenses to the higher-earning partner for a better tax outcome, but the ATO won’t accept this. Incorrectly apportioning deductions could lead to penalties or an audit.
Overclaiming Deductions for Personal Use Periods
A rental property used for personal purposes—even for a short time—affects tax deductions. If you stay in the property yourself, rent it out at a discount to family or friends, or leave it vacant for extended periods, deductions must be adjusted.
Only expenses directly related to generating rental income can be claimed. The ATO frequently reviews claims where properties are listed as “available for rent” but not genuinely marketed. Ensuring the property is actively advertised at market rates can help you stay compliant.
Failing to Keep Proper Records
Accurate record-keeping isn’t just a good habit—it’s essential for claiming the right deductions and avoiding trouble with the tax office. The ATO requires documented proof of all rental income and expenses, yet many property owners fail to keep adequate records.
Capital gains tax (CGT) calculations also rely on proper record-keeping. Purchase costs, legal fees, major renovations, and capital works deductions all impact CGT when the property is sold. Without proper records, investors risk overpaying taxes or facing penalties for incorrect claims.
Miscalculating Capital Gains Tax (CGT) on Sale
When it’s time to sell, many investors underestimate the tax impact. CGT applies to the difference between the property’s sale price and its cost base, which includes the purchase price, stamp duty, and capital improvements.
One common mistake is forgetting to subtract previously claimed capital works deductions from the cost base. This inflates the cost base, leading to a lower capital gain and, in turn, an incorrect tax calculation. Investors who don’t account for this can face unexpected tax bills—or worse, an audit.
Stay Compliant, Save Money
Tax laws around rental properties can be confusing, and mistakes can be costly. But with careful planning and accurate record-keeping, you can avoid common pitfalls and maximise your deductions.
If you’re unsure, consider speaking with a tax professional. The right advice now could save you thousands down the line.
Are you making any of these mistakes? Now’s the time to fix them before the ATO comes knocking.
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