The ATO TOP 10
TIPS FOR AVOIDING
RENTAL PROPERTY
TAX MISTAKES

To help you claim your rental property taxes correctly, the ATO has these top tips:

  1. Understand the difference between repairs and improvements
    Those initial fixes when you buy the property can’t be claimed straight away. They become part of your cost base for capital gains tax (CGT). However, you may be able to claim a capital works deduction later on.

  2. Claim your interest deductions correctly
    You can only claim the portion of interest from your loan that relates to the rental property. If you’ve used part of that loan for something personal, you need to split the interest accordingly.

  3. Know the rules on borrowing expenses
    If your borrowing costs are over $100, you must spread that deduction over five years. Remember, it’s not evenly split – you need to adjust the claim based on how long you owned the property in that first year.

  4. Don’t claim your buying and selling costs
    Expenses like stamp duty and conveyancing fees aren’t tax deductible right away. Instead, they factor into your capital gain or loss when you eventually sell.

  5. Nail those construction costs
    Certain building expenses, such as extensions or major renovations, can be claimed as a capital works deduction (2.5% of the cost over 40 years) starting from the day the work was finished.

  6. Body corporate fees can be tricky
    Payments into the regular body corporate admin fund are fully deductible in the year they are paid. But if the body corporate raises cash for a big project, that’s considered capital and isn’t immediately deductible. You might be able to claim it as a capital works deduction instead.

  7. Splitting income and expenses for co-owned properties
    If you own a rental with someone else, you must declare your share of the income and expenses based on your legal ownership percentage.

  8. Adjusting deductions for personal use
    You can only claim deductions for the time your rental was actually rented out or genuinely available for rent. If you used the property yourself, or it wasn’t always on the market, you must adjust your expenses accordingly.

  9. Keep good records
    You’ll need proof of your rental income and expenses and how you calculated any capital gains or losses.

  10. Calculate your capital gains correctly
    When you sell, make sure your cost base is accurate. Don’t include amounts you’ve already claimed as deductions against your rental income (eg depreciation).

EVEN MORE TIPS TO AVOID RENTAL PROPERTY TAX MISTAKES

Remember this is just a starting point – there are plenty of other ways you can trip up on your rental property taxes.
Here are some more tips:

  • Don’t double-dip on your rental income
    Make sure the figure you receive from your property manager is the total income before expenses. Don’t claim deductions if those expenses have already been deducted.

  • Charge mates the right rent
    If you’re renting to friends or family at a discount, you can only claim deductions based on the rent you actually received.

  • Repairs vs improvements
    Sometimes it can be hard to tell the difference. If your repair essentially replaces an entire existing part of the property, it might count as a capital improvement instead.

  • Depreciation vs capital works
    Knowing the expenses that fall under each category is key. If these are wrong, your deductions will not be correct.

  • Holiday homes must be genuinely available for rent
    You can’t claim deductions on your beach house if you’re the only one using it most of the time. It has to be actively listed and ready for tenants.

  • No deductions for your own sweat equity
    Sadly, all that DIY work you do on your rental doesn’t save you money on your taxes.

  • Prepaid interest has limits
    You can claim prepaid interest upfront, but only if it covers 12 months or less and those 12 months end within the next tax year.

  • Negative gearing is still a thing
    Despite all the talk, you can still claim a loss if your rental expenses outstrip your rental income.

  • Small items get special treatment
    Assets under $300 can be immediately deducted. But if you buy a bunch of related stuff in the same year and the total goes over $300, you’ll need to depreciate them.

  • Holding costs matter even when the property is sometimes empty
    If your rental sits empty between tenants but isn’t genuinely available to rent, those ongoing costs (think council rates) become part of your cost base and affect calculations when you sell.

  • The main residence exemption has tricky rules
    You can’t keep re-activating the exemption every time you rent out your former home. It happens only once, and you must meet the relevant conditions.

  • You can’t just leave town to claim the six year absence rule
    There needs to be an actual change in circumstances for this to apply. A quick holiday doesn’t cut it.

  • Don’t forget land tax and other state charges
    These are generally fully deductible, unlike some other property ownership costs.

  • The ATO is watching
    Sharing economy platforms report data to the ATO and this is matched with other available information. It’s now harder than ever to claim deductions you’re not entitled to.
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