The ATO is cracking down on overclaimed rental expenses in 2025-26. Here’s exactly what you can deduct—and what will get you flagged.
If you own an investment property, the 2025-26 tax return is where the ATO is sharpening its pencil. Rental property deductions are a major compliance focus this year, with the Tax Office using data-matching from rental bond agencies, tenancy databases, and property managers to spot overclaims. Get the deductions right and you save thousands. Get them wrong and you risk an audit, penalties, and interest. Here’s your plain-English guide to what’s deductible, what’s not, and how to stay on the ATO’s good side.
Loan interest is typically your largest rental expense. You can claim the full interest on money borrowed to purchase the property, plus any borrowing costs (loan establishment fees, title search fees, and mortgage broker fees) spread over five years or the loan term, whichever is shorter.
The trap: if you’ve redrawn on the loan for personal use—say, to buy a car or go on a holiday—the interest on that redrawn portion is not deductible. You must apportion the loan. For example, if your original $400,000 loan is now $420,000 because you redrew $20,000 for a personal expense, only the interest on $400,000 is claimable. The ATO is cross-matching bank records this year, so don’t guess.
ATO red flag: mixed-purpose loans: If you have one loan account for both investment and personal use, the ATO expects you to calculate the deductible portion yourself. A simple spreadsheet showing the split is sufficient, but if you’re unsure, ask your lender to split the loan into separate accounts.
You can claim an immediate deduction for repairs that restore the property to its original condition—fixing a leaking tap, patching a hole in the wall, or replacing a broken window. However, if you replace an entire kitchen or bathroom, that’s a capital improvement, not a repair. Capital improvements are claimed over time as capital works deductions (2.5% per year for buildings constructed after 1987).
The ATO is particularly watchful of landlords who buy a run-down property, do a full renovation, and try to claim the whole lot as repairs. You can’t. Initial repairs on a property that was not in a tenantable condition when you bought it are capital in nature. For 2025-26, the ATO has flagged this as a top audit trigger.
Since 1 July 2019, you can’t claim travel expenses to inspect, maintain, or collect rent from your own rental property. That includes flights, fuel, and accommodation. The only exception is if you use a registered tax agent and the travel is part of their work—but even then, the deduction is limited.
If you’re a property investor who lives interstate, you cannot deduct the cost of flying down to check on the place. Use a local property manager instead—their fees are fully deductible. For 2025-26, the ATO has confirmed this rule remains in place, so don’t be tempted to claim a trip to your Gold Coast unit as a “property inspection.”
If your property was built after 15 September 1987, you can claim 2.5% of the construction cost per year for 40 years. This is the capital works deduction (Division 43). For example, if the house cost $300,000 to build, you can claim $7,500 per year.
You need the original builder’s contract or a quantity surveyor’s report to determine the construction cost. If you don’t have it, a registered tax agent can help you estimate it using industry tables. The ATO does not accept guesswork—you need a reasonable basis.
Get a depreciation schedule: A tax depreciation schedule from a qualified quantity surveyor can cost around $600-900 but often unlocks thousands in deductions over the first five years. It covers both capital works and plant and equipment (carpets, blinds, air conditioners). For properties bought after 1 July 2017, you can only claim plant and equipment if they are new and installed by you (not second-hand).
Beyond the big items, here are the everyday expenses you can claim—and the ones you can’t:
Negative gearing means your rental expenses exceed your rental income. You can offset that loss against your other income (salary, business profits, etc.), reducing your overall tax bill. For example, if your rental loss is $10,000 and you earn $100,000 in salary, you pay tax on only $90,000.
There’s no legislative change to negative gearing for 2025-26, but the ATO is scrutinising losses that seem too large relative to the property’s value. If you’re claiming a $30,000 loss on a $400,000 apartment, expect a letter. Make sure your deductions are backed by receipts and contracts.
You must keep records for five years from the date you lodge the return. For rental properties, that means:
The ATO’s data-matching program now pulls information from real estate agents, rental bond authorities, and banks. If your claimed expenses don’t match what’s on file, you’ll get a review notice. The easiest way to avoid that is to use a registered tax agent who specialises in property. Their fee is deductible, and they’ll keep you compliant.
Lodge on time, even if you’re unsure: If you’re missing a receipt, lodge your return by 31 October 2025 (or the extension date if using a tax agent). You can amend the return later for up to two years. Late lodgement attracts a $330 penalty for every 28 days you’re overdue, up to $1,650. Don’t let a missing receipt cost you more than the deduction is worth.