This article is general information only and does not constitute financial or tax advice. Consult a qualified tax professional for advice specific to your situation.
Key takeaways
- The ATO requires receipts for every rental property deduction. Without documentation, the claim gets disallowed in an audit.
- Confusing capital improvements with repairs is the most audited area on rental property returns. Repairs are deductible immediately; improvements must be depreciated.
- If your property was not rented for the full financial year, you must apportion expenses to the rental period only.
- Many landlords miss thousands in depreciation deductions each year, especially on established properties built after 1985.
- Filing late without a tax agent extension triggers a penalty of $313 for each 28-day period the return is overdue.
Your first rental property tax return has more moving parts than a standard personal return. There is rental income to declare, a long list of deductible expenses to sort through, and rules that are not always obvious until you have already got them wrong.
The ATO publishes rental property data every year, and landlords consistently top the list of groups where errors are found. Many of those errors are honest mistakes, things first-time landlords simply did not know about. But honest or not, they cost you money or attract scrutiny you do not need.
Here are seven of the most common ones, and what to do instead.
1. Not Keeping Records Throughout the Year
This is the most predictable mistake, and still the most common. You buy an investment property, rent it out, and spend the next twelve months not thinking much about the paperwork. Then June 30 arrives, and suddenly you are scrambling through bank statements, email inboxes, and kitchen drawers trying to piece together a year's worth of receipts.
The ATO requires you to keep records for every deduction you claim, and they must be kept for five years. If you cannot produce a receipt during an audit, the deduction gets disallowed. That $800 plumber invoice you know you paid? Without the receipt, it is worth nothing.
The fix is simple, even if it takes discipline: log expenses as they happen. Take a photo of each receipt on your phone. Record what the payment was for, when it happened, and which property it relates to. If you track this throughout the year, your EOFY preparation becomes a matter of reviewing and exporting, not reconstructing from memory.
2. Claiming Capital Improvements as Immediate Repairs
The line between a repair and a capital improvement is one of the trickiest parts of rental property tax, and getting it wrong in either direction hurts you. Claim an improvement as a repair and you risk an ATO audit. Fail to claim a legitimate repair and you leave money on the table.
The basic rule: a repair restores something to the condition it was in before it broke or deteriorated. An improvement takes it beyond its original condition.
Replacing a broken tap washer is a repair. Fitting entirely new tapware throughout the bathroom is likely an improvement. Patching a section of damaged fence is a repair. Replacing the entire fence is capital. Repainting walls a tenant scuffed up is a repair. Repainting plus replastering plus adding feature lighting as part of a refresh is moving into improvement territory.
Improvements are not lost deductions. They are just claimed differently, depreciated over time rather than deducted in full this year. They also add to your cost base, which reduces your capital gains tax if you eventually sell the property. For a detailed breakdown with more examples, see our guide to claiming maintenance and repairs on your investment property.
3. Forgetting to Apportion Expenses
If your property was not rented for the entire financial year, you cannot claim 100% of most expenses. This catches first-time landlords who settle on a property in October or November and then try to claim a full year of council rates, insurance, and loan interest on their return.
The rule is that you can only claim expenses for the period the property was available for rent. If you settled in October, your first financial year of ownership covers roughly nine months. Council rates, insurance premiums, and loan interest all need to be apportioned to that period.
The same applies if you used the property for personal purposes at any point. A holiday house you rent out for 40 weeks and use yourself for 12 weeks means you can only claim roughly 77% of shared expenses. The ATO is particularly vigilant about this with holiday rentals.
Vacancy between tenants is treated differently. If the property was genuinely available for rent, advertised and ready for a tenant, you can still claim expenses during that vacancy. But if it sat empty without any effort to find a tenant, the ATO may question your deductions for that period.
4. Not Claiming Depreciation at All
Many first-time landlords claim the obvious deductions like mortgage interest, council rates, and insurance, and stop there. They never think about depreciation, or they assume it only applies to new properties. That assumption can cost thousands of dollars in missed deductions every year.
Depreciation covers the gradual wear and tear on your property's building structure and the assets inside it. There are two categories: capital works (Division 43, covering the building itself) and plant and equipment (Division 40, covering items like air conditioners, carpets, dishwashers, and hot water systems).
Even if you bought an established property, the building structure may still be depreciable if it was constructed after 1985. A quantity surveyor can prepare a depreciation schedule for your property, typically costing $600 to $800, and the schedule itself is a deductible expense. The deductions it unlocks often run into the thousands per year.
One important rule to know: if you purchased a second-hand property after 9 May 2017, you can only depreciate plant and equipment items you installed yourself. Items that came with the property are no longer claimable. But Division 43 capital works deductions on the building structure are unaffected by this rule. For a full walkthrough, see our guide on how to calculate depreciation for your rental property.
Estimate Your Depreciation Deductions
Enter the construction cost and year of your property below to see a rough estimate of what you could be claiming each year.
Enter asset cost, purchase date and effective life to see your depreciation schedule.
5. Mixing Personal and Investment Expenses
If your investment property loan is also used for personal spending, the tax deductibility of your interest gets complicated fast. The ATO looks at the purpose of the borrowed funds, not the security. If you redrew $20,000 from your investment loan to buy a car, the interest on that $20,000 is no longer deductible.
This is one reason many accountants recommend keeping a completely separate bank account and loan facility for your investment property. When everything is in one account, apportioning interest becomes a headache, and mistakes become more likely.
The same principle applies to other expenses. Travel to your rental property for genuine management purposes (inspecting for repairs, meeting a tradesperson) can be deductible. But if you combine it with a holiday, the personal portion is not claimable. If you buy a lawnmower for the rental property and also use it at home, you need to apportion the cost.
Keep your investment finances as separate and clean as possible from the start. It makes every tax return simpler and reduces the chance of an error attracting ATO attention. If your expenses consistently exceed your rental income, use the negative gearing calculator to understand your tax position and make sure you are claiming the full benefit.
6. Not Declaring All Rental Income
Your rental income is not just the weekly rent your tenant pays. Several other types of payments count as assessable income, and forgetting to include them is a common error.
If you keep part or all of a tenant's bond to cover damage or unpaid rent, the amount you retain is income in the year you receive it. Insurance payouts for lost rent or property damage are also assessable. If a tenant pays you a separate amount for a parking space, garden maintenance, or any other facility, that counts too.
The ATO can cross-reference your declared rental income against bond lodgement records, insurance company data, and even property listing prices. Under-declaring, even accidentally, is one of the fastest ways to trigger a review.
Make sure you are capturing everything. For a complete picture of what counts as assessable rental income, see our guide on whether rental income is taxable in Australia.
7. Filing Late and Missing Deadlines
If you lodge your own return through myTax, the deadline is 31 October. If you use a registered tax agent, you generally get until 15 May of the following year, sometimes longer depending on your agent's schedule.
Filing late without a tax agent extension means a failure-to-lodge penalty of $313 for each 28-day period the return is overdue, up to a maximum of five penalties. If you also owe tax and pay late, the ATO charges interest on the outstanding amount as well.
For first-time landlords, the risk is not laziness. It is that preparing your first rental return takes longer than expected because your records are incomplete and you are learning which schedules to fill in. Start early. Begin pulling your records together in May, not September.
For a complete walkthrough of the lodgement process, see our guide on how to prepare your rental property tax return.
The Common Thread
Most of these mistakes come back to one thing: not having your records organised from day one. When your income, expenses, and documents are tracked as they happen, tax time becomes a review process rather than a reconstruction project. When they are not, every mistake on this list becomes more likely.
If you are looking for a way to keep everything in one place throughout the year, propkt is built for exactly that. It tracks your rental income, expenses, depreciation, tenants, and documents property by property, so when your accountant asks for your numbers, you can hand them over without the scramble.