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If you’ve just bought an investment property or are looking to buy one, you need to understand the tax consequences, including which deductions you can claim. 

Making a mistake can prove expensive if the ATO audits you. As a tax specialist at H&R Block, here’s my simple guide to help get your taxes right… and stay off the ATO’s radar.

Rent and other income

• The income received is taxable to the owners of the property in the same proportion as the ownership interest as shown on the title. 

• The rent received must be at normal market rates to be able to claim all the expenses in full. 

Important: if you rent a property to family or friends at below the market rental value, you can only claim deductions up to the amount of rent charged. 

• The rent must be declared in the year it is received.

Tax Deductions

Interest claims

Interest paid on the loan used to purchase the property is deductible, as long as all the money borrowed was used to purchase the property. 

For accounts that are a line of credit and used privately as well, the interest claim needs to be apportioned for the private expenses. 

Repairs

Repairs made to the property during the period it is leased are deductible. 

Be aware: repairs made at the time the property was purchased are generally not tax deducible. For this reason, you can expect the ATO to scrutinise any claims which relate to the first 12 months of owning the property. 

Tip: these “initial repairs” can be used to reduce a capital gain on disposal.

Improvements

Improvements you make to the property are not deductible in full. To the extent the property itself is improved, the cost needs to be depreciated over 40 years (more on this below). 

Where the items upgraded are removable (such as ovens, dishwashers, freestanding lamps, etc), the cost can be depreciated over the effective life of the asset.

Other deductible expenses can include:

• advertising for tenants

• bank charges

• body corporate fees

• cleaning

• council rates

• electricity and gas

• gardening

• lawn mowing

• in-house audio/video service charges

• insurance

• land tax

• legal expenses releases etc.

• lease costs

• pest control

• mortgage discharge expenses

• property agent’s fees

• quantity surveyor’s fees

• security

• stationery

• postage

• telephone

• water charges

• lenders mortgage insurance (usually written off over the shorter of the term of the loan or 5 years).

Building cost write off

If the building is under 25 years old you will be entitled to claim a deduction of 2.5% per year of the original cost of construction of the building for up to 40 years from the original date of construction. 

If you do not know the building cost, a quantity surveyor can determine the building costs and prepare the depreciation schedules for the property and let you know what can be claimed.

Note: a deduction cannot be claimed for the costs of acquiring or disposing of the rental property. Examples of these types of expenses include:

• purchase cost of the property

• conveyancing costs

• advertising expenses

• building inspection reports

• travel to view property prior to purchase  

• stamp duty on the transfer of the property. 

However these costs may form part of the cost base of the property for Capital Gains Tax purposes.

Note: in the ACT where properties are leasehold, costs incurred on stamp duty and legal expenses are allowed.

Tips for getting your tax right

Other than the deductions we’ve already covered, you may also be able to claim the following:

Prepaid expenses

If you pay an item of expenditure this year which wholly or partly relates to next year, you can claim a deduction for the full amount this year. This is particularly useful with expenses that straddle the tax year like insurance policies or subscriptions.

Communication tools

If you use your home phone, computer or internet services, or mobile phone as part of the management of your investment property, you can claim an appropriate proportion as a tax deduction.

Tips on how to avoid getting into trouble with the ATO

Repairs and maintenance

Generally speaking repairs and maintenance costs are allowable for tax but be very careful if you’re claiming costs that relate to an issue that existed before you purchased the property. 

The ATO often denies instant deductions in this scenario on the basis that such “repairs” are often of a capital nature, being repairs done to rectify defects that existed when the property was acquired. 

Rent the property commercially

In order to claim deductions, you need to let the property on a commercial basis. 

If the property is being let rent-free (or at a non-commercial rate) for example to friends or family, the amount of deductions you can claim will be limited to the amount of rental income you earned.

Vigilant record keeping

Always keep detailed records of all income and expenses. If the ATO reviews or audits your tax return, you will need your supporting documentation to justify your deduction claims. 

You should keep records for five years from the date you lodged your tax return. For Capital Gains Tax purposes, you should keep purchase and sale documentation (together with details of any capital improvements) for at least five years from the date of lodging the return showing the disposal of the property. 

Given that you may own the property for a long period, your purchase documentation will need to be stored safely for many years.

Bottom line

Understanding the tax implications of owning an investment property is vital for your bottom dollar – especially if you want to avoid a tax penalty from the ATO. 

Some of the things you should be on top of include: 

• how to manage rental income

• what deductions you can make

• keeping detailed records

• ensuring all claimed expenses are legitimate. 

By following these guidelines and staying up to date with ATO requirements, you can maximise your investment property returns while avoiding potential audits and penalties.

If you’re ever in doubt, it’s wise to talk to a tax professional. 

Go deeper: 

How does negative gearing really work?

Financial disclaimer

The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.