The ATO has highlighted common errors it has found in tax returns of property investors, esppecially first time investors.

Incorrectly claiming deductions can be costly.

Common mistakes

  • Claiming deductions for rental properties not genuinely available for rent
  • incorrectly claiming deductions for properties only available for rent part of the year, for example a holiday home
  • incorrectly claiming the cost of structural improvements as repairs when they are capital works deductions, such as remodelling a bathroom or building a pergola, and
  • overstating deduction claims for the interest on loans taken out to purchase, renovate or maintain a rental property. A loan can be taken for both income-producing and private purposes, like to buy a car or go on an overseas holiday. The interest on the private portion of the loan is not tax deductible.

Advice for claiming rental deductions

There are two categories of rental property expenses you can claim:

  • expenses for the year you paid them, like council rates, repairs, insurance and loan interest, and
  • expenses that are deductible over a number of years, like borrowing costs, creating structural improvements and costs of depreciating assets.

You cannot claim costs associated with acquiring or disposing of a property, but they may form part of the cost base of the property for capital gains tax purposes.

Renovation costs and costs to repair damage, defects or deterioration existing on purchase cannot be claimed as an immediate deduction. These costs are capital expenditure, depending upon what is repaired or improved, and must be claimed as either decline in value deductions over the asset’s effective life, or as capital works deductions over 40 years.

More detail can be found in the ATO publication Rental Properties 2007